These sectors fared Best when the Stock Market Last Crashed

The stock market decline on Thursday was the worst since February 2014, as investors worrying about oil, China and Federal Reserve policy fled stocks and moved money into U.S. Treasury bonds and gold.

The S&P 500 Index SPX, -3.19%  plunged 3.2% Friday, its largest decline in four years. The benchmark index lost 5.8% last week, its biggest one-week percentage drop since Sept. 23 2011, and is now down 4.3% this year.

Here’s a chart showing how the index has performed over the past five years:

 

The biggest drop during that period was from July 22 through Oct. 3, 2011, when the index fell 18.3%. Here’s how the 10 S&P 500 sectors performed during that period, from best to worst:

S&P 500 sector	Decline from July 22 through Oct. 3, 2011
Utilties	-2.9%
Consumer Staples	-7.5%
Telecommunications Services	-8.5%
Health Care	-13.5%
Information Technology	-14.4%
Industrials	-17.3%
Consumer Discretionary	-17.5%
Financials	-26.4%
Energy	-27.4%
Materials	-28.0%
Source: FactSet

It’s important to point out that many sector dynamics have changed since 2011.

The U.S. financial industry is, of course, in much better shape, following years of capital building and belt tightening. Higher interest rates would be good for banks, most of which have balance sheets positioned so that yields on loans and investments will rise faster than funding costs when the Federal Reserve begins raising short-term interest rates.

The energy industry is in the midst of a painful shake-out following years of oil-production increases in the U.S., a firm commitment by Saudi Arabia to keep production high to defend its market share, and slow overall demand.

The telecommunications-services and consumer-discretionary sectors are being greatly affected by the pounding that television-content producers and pay-TV service providers have been taking as investors perceive that “cord-cutting” is accelerating.

But there’s no denying that utilities were the strongest group of stocks during that terrible summer of 2011.

Here’s a look at sector performance during the most recent large decline for the S&P 500. It slumped 7.4% from the close on Sept. 18 through Oct. 14, 2014:

Certain industries shine when the going gets tough

S&P 500 sector	Change from Sept. 18 through Oct. 14, 2014
Utilties	1.3%
Consumer Staples	-2.1%
Telecommunications Services	-3.9%
Health Care	-6.7%
Financials	-7.3%
Industrials	-7.8%
Consumer Discretionary	-7.8%
Information Technology	-8.1%
Materials	-10.0%
Energy	-13.6%
Source: FactSet

The same four sectors ranked highest for both periods — the summer of 2011 and the fall of 2014 — with utilities in the lead each time. The utilities sector actually rose 1.3% during the last big market decline.

You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress – “Warren Buffett”

The quote above was included among the 23 bits of wisdom from the legendary value investor discussed by Paul Merriman on Wednesday. It’s hard to argue with Buffett’s logic. The only thing you can count on when investing in stocks is that there will be periods of extreme volatility. It’s also important for long-term investors to be patient and stick with long-term strategies.

So what does the possibility of a broad decline over a period of weeks mean to you? It clearly means nothing to Buffett, unless the drop is so large that he is tempted to lead Berkshire Hathaway into making another discounted acquisition.

If you’re holding utility stocks, you might feel safer — and at the same time enjoy a high level of dividend income.

Then again, maybe it might help your long-term discipline to see how the S&P 500 sectors have performed over the past 10 years:

S&P 500 sector	Total return
Health Care	192%
Consumer Staples	180%
Consumer Discretionary	173%
Information Technology	143%
Industrials	141%
Utilities	115%
Materials	105%
Telecommunications	101%
Energy	64%
Financials	5%
Source: FactSet

Health care has been the best sector for just about any time period you look at over the past decade, reflecting not only the aging of the U.S. population, but the constant stream of innovation.

The strength in the two consumer sectors reflects the dominance of consumer services in the U.S. economy.

So will you listen to Buffett or will you be up late worrying? Either way, the performance of the sectors can help you to act accordingly.