Strength is Risk

Macro factors are non-discriminatory.  High energy costs affect all airlines, and high interest rates impact all financial companies.  It then makes sense that most stocks will do what their sector does.

The chart below demonstrates this.  KLD ranked the annual returns of the 31 Hemscott/Morningstar-defined industries for 2000 through 2007 (discarding the top and bottom two performing sectors to eliminate outliers) and compared the remaining strongest and weakest industry average returns to returns of individual stocks comprising the respective industries.  In all years at least 73% of the strong industry stocks beat the weak industry average return, while no more than 24% of the weak industry stocks beat the strong industry average return.

In short, returns can be enhanced simply by being in the right sector.

Sector information can and should be used to help determine overall t0p-down market exposure.  This should reduce overall risk by ensuring that one is flowing with, not against, the prevailing direction of the market’s sectors.

The stronger the industry, the better the individual stock returns. Heed sector forces. (Sources: Worden Brothers Inc., Morningstar, KLD Capital Management.)