An article in the Wall Street Journal recently reminds me of an old Sunday school lesson from years back that applies perfectly to the stock market… the first shall be last.
The Journal points out that after “a reign that began in February 2002, the financial sector” is no longer #1 in the S&P 500 Index. Last week, banks, brokers and other financial shares in the blue-chip index slipped to a 16% weighting.
That puts financial shares in second place, just a shade behind the technology sector's presence at 16.4% of the index.
That’s the first time in six-years that the leadership has changed in America’s most widely followed stock index.
As the article points out, this change at the top isn’t due as much to strength in tech – as to the shellacking taken by financial stocks in the past 12-months.
The S&P financial sector index has plunged more than 30% – or $814 billion in lost market value – since June 1, 2007 – the biggest loser by far among any of the 10 major sectors.
There’s a cautionary tale here for investors who believe that big financial stocks like Citigroup will quickly rebound from sub-prime woes. The technology sector was far and away the biggest sector in the S&P 500 back in the 1990’s, but suffered a long and painful fall from grace.
Tech shares peaked at nearly 35% of the S&P 500 back in 2000 then fell victim to a violent bear market that saw tech shares lose nearly 80% of their market value in less than three years. Tech stocks made up less than 13% of the S&P 500 by October 2002.
Energy stocks were the kings of the hill prior to tech shares, and also fell from grace. In the early 1980’s the energy sector made up 30% of the S&P 500, but declined to just over 5% by early this decade. With crude oil touching $135 a barrel recently, the energy sector is enjoying a nice come-back, and now makes up about 15% of the blue-chip index again.
Judging from the dramatic reversals of fortune suffered by tech shares and energy sector stocks in the recent past, financials may have a lot more room to decline in the years ahead.
And since they are well represented in popular indexes such as the S&P 500 and the Dow Jones Industrials, financial sector shares could be a major drag on overall stock market performance for quite some time. Stay tuned.
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