investing

Stock Sectors: The Secret To Balancing Risk & Return In The Stock Market

Tucker Ammons

WealthFit Contributor

In the fantasy world of movie superheroes, each protagonist has a unique set of characteristics—otherwise known as superpowers—that makes him or her irreplaceable.

Iron Man uses his unparalleled technology, the Hulk relies on brute strength, and Wolverine has the power to regenerate health.

The stock market is divided into 11 sectors fundamental to the U.S. economy, and just like superpowers, each sector has a unique set of characteristics that investors can take advantage of to maximize returns.

You can unlock your inner superhero by leveraging the powers of each sector to master the stock market.

There are 11 major sectors (categories of companies) that represent the industries of the US economy:

  • Healthcare
  • Utilities
  • Consumer Staples
  • Technology
  • Financial
  • Consumer Discretionary
  • Basic Materials
  • Real Estate
  • Communications
  • Industrials
  • Energy

Understanding and taking advantage of the differences between industries can lower risk and improve returns.

Stock Sectors

The most common way to distinguish between the 11 stock market sectors is by dividing them into two groups:

  • Defensive
  • Cyclical

The defensive and cyclical sectors respond differently to business cycles, or natural fluctuations in the economy between periods of economic growth and recessions.

The basic tenant is to invest in cyclical sectors when times are good and invest in defensive sectors when times are bad.

Having both tools in your arsenal gives you an edge.

Ready to learn more?

The first step is to understand how exactly the 11 sectors fit into the defensive and cyclical groups.

Defensive Stock Sectors

Defensive sectors are considered stable—they aren't affected much by market downturns.

The demand for these products and services are more consistent and resistant to changes in the economy.

For example, there is always going to be a need for toilet paper and toothpaste.

Risk-averse investors who want to be on the “defensive” side may benefit from investing in stocks and mutual funds in the following sectors:

Healthcare

Health is always a priority. As a consumer, you’re always going to need access to a doctor, a pharmacy, and health insurance.

The healthcare sector covers a broad spectrum of companies including drug and medical device manufacturers, biotechnology, pharmacies, hospitals, and insurers.

An aging population, improving quality of life in developing countries, and new technology makes the healthcare industry a solid bet to invest in, even during a market downturn.

Notable companies in this sector include: CVS Health Corp (NYSE:CVS), Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), UnitedHealth Group (NYSE:UNH).

Utilities

Utility companies provide many of the necessities that we take for granted, including electricity, water, and telephone services.

While not poised for extreme growth, consumers are always going to pay for lighting and a warm shower.

Notable companies in this sector include: California Water Service Group (NYSE:CWT), Consolidated Edison (NYSE:ED), Duke Energy (NYSE:DUK).

Consumer Staples  

When the economic outlook is bleak, consumers aren’t going to buy the latest iPhone or Gucci purse.

They will, however, continue to buy consumer staples—food and toiletries.

Consumers staples also include products that people may not need, but will still want to buy during recessions, such as cigarettes and alcohol.

Notable Companies in this sector include: Campbell Soup Co (NYSE:CPB), Proctor & Gamble (NYSE:PG), Reynolds American (NYSE:RAI), Walmart Inc (NYSE:WMT).

Cyclical Stock Sectors

Cyclical sectors thrive when the economy is booming and are negatively affected by market downturns.

While you should take advantage of cyclical sectors during a time of economic prosperity, be wary of investing in these sectors when there are signs of a slowing economy.

In anticipation of a bull market—a market where share prices are either rising or expected to rise, which encourages buying—look to invest in the following sectors:

Technology  

In an age of technological innovation, this sector dominates headlines.

Led by the “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google), this sector includes companies that produce technology products and services that are hot and trending.

Most investors expect the technology sector to continue growing and rapidly disrupt the marketplace.

However, expect consumers to take a brief pause from binge-shopping on Amazon when the economy slows.

Notable companies in this sector include: Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT)

Financial

The financial sector consists of companies that provide financial services including banks, credit card companies, and insurance companies.

As we saw in the 2008 recession, the financial sector struggles when the economy underperforms.

Consumers and businesses tend to reduce investment activity when they feel financial strain.

When times are good, expect cash to flow through banks and credit card companies.

Notable companies in this sector include: Allstate Corp (NYSE:ALL), American Express (NYSE:AXP), Bank of America (NYSE:BAC), Visa (NYSE:V), Wells Fargo (NYSE:WFC).

Consumer Discretionary

Unlike the consumer staple sector, the consumer discretionary sector consists of products and services that are non-essential.

These goods are desirable when the economy is strong, and consumers have excess income to spend.

This sector includes:

  • apparel
  • restaurants
  • leisure
  • entertainment
  • travel

Notable companies in this sector include: Marriott International Inc. (NASDAQ:MAR), Starbucks Corp (NYSE:SBUX), Walt Disney Co (NYSE:DIS), Williams-Sonoma, Inc. (NYSE:WSM).

Basic Materials  

Companies involved in the discovery, development, transportation, and processing of raw materials make up the basic materials sector.

Raw materials consist of natural resources, including metals such as copper and gold, chemicals, and forestry products such as lumber.

Basic materials perform in line with consumer discretionary goods.

Demand for basic materials that are used in the production of consumer goods and real estate decreases when the economy is underperforming.

Notable companies in this sector include: Dupont (NYSE:DD-B), Monsanto (NYSE:MON) , Steel Dynamics, Inc. (NASDAQ:STLD), Vulcan Materials (NYSE:VMC)

Real Estate

The real estate sector consists of commercial, residential, and industrial real estate.

A booming real estate market is one of the main indicators of economic wealth.

Residential real estate consists of homes, commercial real estate consists of offices and retail spaces, and industrial real estate consists of factories and other manufacturing facilities.

Notable Companies: Simon Property Group (NYSE:SPG), Public Storage (NYSE:PSA), Prologis (NYSE:PLD), Weyerhaeuser (NYSE:WY).

Communications  

The communications sector has thrived in the Information Age because it is comprised of companies that are in the business of distributing information.

Communication companies make the exchange of information possible on a global scale.

The sector consists of:

  • wireless providers
  • cable providers
  • telecommunications companies
  • satellite companies

Notable companies in this sector include: AT&T (NYSE:T), Cisco Systems, Inc. (NASDAQ:CSCO), Qualcomm (NASDAQ:QCOM), Verizon (NYSE:VZ).

Industrials  

The industrials sector consists of companies that are directly involved in producing and manufacturing finished goods.

The sector includes industries such as:

  • aerospace
  • defense
  • construction
  • lumber, machinery
  • transportation

The performance of the industrial sector is tied to consumer spending and industries like commercial and residential real estate.

Notable companies in this sector include: Boeing (NYSE:BA), Deere & Company (NYSE:DE), United Technologies Corp (NYSE:UTX), Union Pacific (NYSE:UNP).

Energy

The energy sector covers a spectrum of companies from oil drillers to electric utilities. The sector follows companies throughout the entire energy process from oil and natural gas drilling, transportation, processing, and refining.

Energy companies are prone to unique risks such as geopolitical risks and supply shortages.

With a huge global demand for oil, investing in the energy sector can be a good bet.

Notable companies in this sector include: Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Marathon Petroleum (NYSE:MPC), Renewable Energy Group (Nasdaq:REGI).

A Word of Caution

Both the defensive and cyclical sectors arm investors with tools to respond to any market situation.

Every sector has its strengths and weaknesses, and if used correctly can be great additions to a portfolio.

Be careful not to have too much exposure to one sector, especially in the short term. It’s never wise to put all your eggs in one basket.

Investing solely in one sector will increase risk compared to investing in more diverse indices such as the S&P 500.

The best way to incorporate sector investments—and lower your risk—is by adding them to your core portfolio in response to the economic conditions that defensive and cyclical stocks best perform in.

This comes from you first understanding and secondly monitoring these conditions.

If you plan to put your hard-earned money into a stock, then you should know how its sector has performed and what the current economic landscape is.

Being informed about a stock’s sector provides helps to paint the whole picture on an otherwise blank canvas.

Follow Your Investment Strategy

Make sure to tailor these investments to your investment strategy.

Defensive stocks may be more attractive to risk-averse investors while cyclical stocks fit well into a growth-minded investors portfolio.

An ordinary investor can become a stock superhero by leveraging the superpowers of both the defensive and cyclical stock sectors to make the best available investment decisions.

Share

Written By

Tucker Ammons

Tucker Ammons is an investment banking analyst at Bourne Partners, a boutique investment bank in Charlotte, North Carolina.

Read more about Tucker

RELATED TRAINING

 in 

INVESTING

article
How to Quickly Calculate Market Cap to Find the Value of Any Business

Learn how to calculate market capitalization, why it’s important for your investing strategy, and how to build a stock portfolio that balances risk and return.

How to Quickly Calculate Market Cap to Find the Value of Any Business

Tucker Ammons

Read Now
article
Everything You Need To Know About IPOs

Learn what an Initial Public Offering (IPO) is, how they work, where to find them, and when it’s a good idea to invest in one.

Everything You Need To Know About IPOs

Tucker Ammons

Read Now
article
How To Perform A Security Risk Analysis

Discover how to perform a security risk analysis. Learn step-by-step methods to analyze the systematic & unsystematic risk of any security.

How To Perform A Security Risk Analysis

Tucker Ammons

Read Now
article
Stock Market Investing Strategies: Which One Is Right For You?

Learn the 3 questions to help you choose what stock market investing strategy is right for you.

Stock Market Investing Strategies: Which One Is Right For You?

Tucker Ammons

Read Now
article
How To Read a 10K Report & Start Picking Better Stocks

Learn to read and understand any company’s 10-K report to accurately gauge the company’s health and make an informed investment decision.

How To Read a 10K Report & Start Picking Better Stocks

Tucker Ammons

Read Now
article
How To Read a Stock in 60 Seconds

Do you wish you could pick up a stock sheet and understand all of it? Learn how to read a stock like a pro and speak the language of seasoned stock investors.

How To Read a Stock in 60 Seconds

Tucker Ammons

Read Now
live talk
Why Hiring The Right Financial Advisor Is Essential

What are fee-only advisors and are they for you or not? Dustin Mathews and guest Taylor Schulte talk about staying wealthy, conflicts of interest, and having an efficient financial planner. You'll also understand what the single biggest purchase of your life is and how you are making tax decisions every single day!

Why Hiring The Right Financial Advisor Is Essential

article
6 Options Trading Strategies for 2020

Utilize these 6 options trading strategies whether the markets are bullish, bearish, stagnant or volatile.

6 Options Trading Strategies for 2020

Chris Beer

Read Now
article
How to Buy a House Without a Realtor

Follow this 8-step process to buy your dream home while avoiding paying hefty fees to a realtor. Also, learn how to find the right real estate attorney and the best inspectors.

How to Buy a House Without a Realtor

Abhi Golhar

Read Now
live talk
A Radio Ad, The Rehab & Purposefully Networking

Amy Mahjoory takes us through her journey from leaving corporate America and investing in Fortune Builders, to building her real estate empire. Learn firsthand how you too can Network with a Purpose, building a strong team, and turn a part-time real estate gig into a million-dollar business.

A Radio Ad, The Rehab & Purposefully Networking

live talk
Almost Going Public, Investing In Horses & Culture

From restaurant investor to horse investor, Eric Berman is the "Millionaire Matchmaker" who pairs investments, brands and influencers with their ideal audience! Listen in as he and Dustin discuss the best ways to brand a business and teach you exactly how to stay on top of digital marketing trends.

Almost Going Public, Investing In Horses & Culture

live talk
Rebounding From A Near Death Experience, Bankruptcy & The Crash

In this jam-packed talk, Dustin is joined by real estate investor and tech entrepreneur, Steve Jackson. Listen in and hear the "close calls" that finally led to the dream of having a portfolio of passive income-generating properties.

Rebounding From A Near Death Experience, Bankruptcy & The Crash

live talk
Title Insurance Explained

If you've ever purchased a property, you've almost certainly had title insurance reducing your risk. But what happens when things go wrong? Jeff Gross, explains all in this eye-opening talk.

Title Insurance Explained

Investing 101 for Teens

Investing 101 for Teens

The Beginner’s Guide to Smart, Successful Investing

JP Servideo

Watch Now
live talk
Funding Startups, IPOs & Dream Toolbox

When one has over 40 years of experience in and exposure to the entrepreneurial world, one gains unique insight and knowledge that is highly valuable. Learn what Kenneth Aldrich knows without needing decades under your belt.

Funding Startups, IPOs & Dream Toolbox

live talk
Celebrity Deals, Pitch Tips & Angel Investing

Greg Writer is a serial entrepreneur who started trading stocks at 19 and now makes tens of thousands of dollars a month. Learn from his mistakes and successes as he talks about his experience as an Angel Investor.

Celebrity Deals, Pitch Tips & Angel Investing

live talk
How To Invest In Apartment Buildings

Michael Becker of SPI Advisory, on apartment building investing: how to find properties, make deals, and create passive income from rent.

How To Invest In Apartment Buildings

Cash Flow The Stock Market

Cash Flow The Stock Market

How to Leverage the Stock Market to Create Multiple Streams of Income

Andy Tanner

Watch Now
Stock Investing 101

Stock Investing 101

How To Invest In Stocks (Even If You Have No Money To Invest)

Andy Tanner

Watch Now
Before You Invest

Before You Invest

The 4 Secrets to Making Smarter, Safer Investment Decisions

Andy Tanner

Watch Now
Invest Like Warren

Invest Like Warren

How To Make Money With Assets You Don't Even Own

Andy Tanner

Watch Now
Start Your Own Real Estate Investing Business

Start Your Own Real Estate Investing Business

How to Flip Houses & Buy Rental Properties for a Living

Than Merrill

Watch Now
Facebook Messenger Marketing

Facebook Messenger Marketing

How To Find Your Next Great Investment Property on Big Blue

Bob McIntosh

Watch Now
Real Estate Fix & Flip Showcase

Real Estate Fix & Flip Showcase

Behind-the-Scenes on 13 Successful Rehab Projects

WealthFit Trainers

Watch Now