Relationship between sectors and stocks

• Some sectors, such as FMCG and leisure, rely heavily on sales to consumers, while other industry sectors such as chemicals and environmental services target industrial buyers. For yet other sectors, like defense and aerospace, the government is a major customer. These differences matter when it comes to gauging the effects of different economic indicators, such as consumer confidence, durable goods order position, or the budget deficit on different sectors. 

• Some sectors, such as retailing for one, are labor intensive, others like utilities are capital intensive, and some like transportation are very fuel intensive. These differences likewise matter when it comes to assessing how different kinds of macro-economic shocks like wage inflation, interest rate spikes, and energy price shocks can impact individual stock price movements. 

• Some cyclical sectors, such as autos and paper, are closely tied to changes in the business cycle and are the first to tank during a recession. Other sectors like food and healthcare are non-cyclical and therefore much more immune to a recession. This distinction will help you find winners to ride in a bull market and defensive sectors to flee to during a downturn. 

• Sectors like agriculture, electronics, industrial equipment, and pharmaceuticals, are export oriented, while other sectors such as financial services and healthcare derive relatively little revenues from foreign trade. In general, stock prices of companies in export-dependent sectors will react much more strongly to news about trade deficit and currency fluctuation. 

• The degree of exposure to regulatory risks such as price controls, litigation or new taxation, as well as a sector’s vulnerability to exogenous shocks such as floods and drought, are likewise important sources of stock price movements in sectors like drugs, tobacco and agriculture.

Exploiting and trading these kinds of sector differences is at the core of an intelligent investing or trading approach and a major source of the investor’s market edge. By continually viewing the stock market at the sector level, you will learn to pick the right stocks in the right sectors at the right time — and stay away from the wrong stocks in the wrong sectors.