In a down market for stocks this year, how significant has the difference been between the relative winners and losers?

As investors, we often tend to think of what happens in markets based on the direction of indexes such as the S&P 500 or Russell 2000 on a given day or over time. That doesn’t always tell the whole story though. Underlying those diversified gauges of the market are sometimes very different stories for specific stocks or market sectors (e.g., technology, financials, or energy). In fact, the difference between the top- and bottom-performing sectors is typically in the range of 25 to 50% in any given year. That differential can widen significantly at times, as was the case in the late 1990s/early 2000s, in 2020, and this year. This tends to be the case during periods of heightened volatility but can also be seen during periods when market leadership, cyclical investment themes, or broader market fundamentals go through a period of transition.

In 2020, sector dispersion was unusually wide, reaching 78% between the best-performing technology sector (up 44%) and the worst-performing energy sector (down 34%). This year, that differential has been even more magnified, as tailwinds from supply dynamics and surging commodity prices boosted the energy sector by nearly 70% through October, while growth-oriented sectors with higher valuations have struggled under the weight of rising interest rates. The result? The performance differential between the top-performing sector (energy) and the worst-performing sector (communication services) has been significant — more than 100% through October 31.

Why does this matter? Periods like this can provide greater opportunities for active managers to add value. In addition, the sharp reversal in sector leadership over the past few years illustrates the dangers of chasing performance, the importance of remaining diversified, and the benefit of rebalancing. Past performance doesn’t predict future results; today’s strong performers often become tomorrow’s laggards.