Why you should know what a sector is

Michael Scott got it all wrong

According to The office, “There are four types of business: tourism, food service, railways and sales. And hospitals/manufacturing. And air travel.”

In fact, there are 11 types, at least in the eyes of Standard & Poor’s and the Global Industry Classification Standard (we’ll explain each below). Some sectors dwarf others. For example, IT makes up almost 30% of the US’s most recognized stock market index, the S&P 500. This makes a lot of sense when you consider that Apple and Microsoft are both classified as IT companies, and they have a combined market value close to $6 trillion .

But why divide the business world into sectors at all?

Well, pies need to be cut, and layered dip is better than plain. Plus, classifying companies in a clear way allows investors, media people, government officials and everyday Joes to discuss the global economy using a common language with mutually agreed upon definitions. It also allows us to measure growth and decline at the industry level, which comes in handy during rapid economic shifts.

Identifying and analyzing various sectors also makes it easier to invest in (or simply watch) high-growth vs. low growth industries. In other words, understanding the sector breakdown of the stock market can potentially make you money, or at least help you choose a professional field that isn’t actively bust. More on all that in just a moment.

By the numbers

-7%: How the S&P utilities sector has performed so far in 2023

11: Sectors in the S&P 500

28%: Portion of the S&P 500 that makes up IT

$35 trillion: Approximate market capitalization of the entire S&P 500, including all 11 sectors

55%: How much the best performing S&P 500 sector, IT, has risen so far in 2023

163: Officially recognized sub-industries in the S&P

You get a sector, you get a sector!

A sector for everything, everything in its sector

The S&P 500, the leading measure of the US stock market, consists of 11 distinct sectors, each with its unique dealio.

IT. Dominated by tech giants like Apple, this sector leads with innovations in hardware, software and privacy breach.

Communication Services. With regard to media, telecommunications, and Internet services, companies like Verizon enjoy a permanent lien against your paycheck. Google and Meta are also in this category.

Finance. This sector includes banking, insurance and investment firms.

Healthcare. Major pharmaceuticals, biotech companies and healthcare providers make up this sector, including Johnson & Johnson and Merck.

Consumer discretionary. Companies that provide non-essential goods and services, such as Amazon, Disney, and your favorite burrito chain, fall under this category.

Consumer staples. Triscuits. Type pods. Strange shampoo on the bottom shelf. The consumer staples industry includes food and household items, with Procter & Gamble and Coca-Cola carrying weight.

Property. Real estate investment trusts (REITs) and property management firms define this sector and want to remind you that rent is due on the 1st.

Material. These companies produce raw materials like metals, chemicals, cotton, plastics, logs, the smelly stuff they use to pave roads – you name it. Think Dow and DuPont.

Industries. This sector spans aerospace, defense, machinery, transportation, and anything else STEM majors are interested in. Boeing and 3M visit here.

Utilities. These companies provide essential services such as electricity and water, and include stalwarts such as NextEra Energy, Dominion and Duke Energy.

Energy. Dominated by oil and gas companies such as ExxonMobil and Chevron, this sector is crucial to meeting the world’s energy needs and causing climate change.

Look at this!

Unsubscribe this smart, clear visualization of the sectors of the S&P 500.

Battle of the behemoths

AirPods and urgent care = $$$

The IT sector’s dominance in the S&P 500 is a reflection of how much time we spend on our phones in the bathroom at parties, on the couches, or at family dinners pretending to text important messages while actually Googling “how to family -meals to escape.”

The next biggest sector is healthcare, because that 10-minute Zoom with a nurse in Minnesota isn’t free, but at least she wrote you a Z-Pak script. Some of the smallest sectors, including energy — would you believe oil prices are volatile — and real estate tend to be capital intensive and subject to fluctuating commodity prices and Federal Reserve decisions.

Sector secrets are kind of fun

Insight that can make you money—maybe

In a world where too many things are happening all the time, an understanding of sectors turns the complicated and abstract into the readable, making the financial landscape comprehensible and accessible to all. All of a sudden you can identify which types of businesses are on the rise and which types are fading away.

What’s more, you’ll finally understand what TV talking heads mean when they discuss “sector rotation.” This is a fancy phrase for when money managers take funds out of declining sectors and put them into sectors with higher growth rates. For example, when Wall Street types see unemployment rising, they tend to shift dollars from consumer discretionary to consumer staples, betting that people will forgo Disney vacations but not Fritos.

There is a potential investable angle in all of this for you too. You can bet your savings on individual sectors if you so choose. For example, ETFs (exchange-traded funds, i.e. investment vehicles made up of relevant assets) tracking the IT sector have soared by around 30% so far in 2023. At least you will get a sense of the most important parts and aspects of the global economy, and that is not nothing.

Quotable

Of course, not everyone feels that sectors are worthy of investment. Some people are bulls but industry agnostic.

“I really don’t pay attention to individual sectors, I just want to make a bet on capitalism and humanity over the next few decades.”—Morgan Housel, New York Times bestselling author of The psychology of money and Same as everin an Instagram DM with Quartz

Pop quiz

Is Netflix classified as a communications services or consumer discretionary company?

The answer is not classified. Find it at the bottom of this email.

Brief history

1957: The S&P 500 market index is introduced.

1999: Morgan Stanley Capital International and Standard & Poor’s introduce the Global Industry Classification Standard, which is now used to identify and describe the nature of nearly every publicly traded business in the world.

2007: Michael Scott identifies the REAL four types of business on an episode of The office.

2015: The GICS and S&P recognize a new sector, real estate.

2018: S&P is reclassifying Google and Meta within communications services, rather than IT, an event sometimes referred to as “The Great De-FAANGing.”

Fun fact!

Cigarette giant Altria is classified as a consumer staple, not consumer discretionary. Costco and Dollar General are also considered consumer staples.

Opinion poll

Which of these should be the 12th sector in the S&P 500?

• Nail care
• Sneakers
• Gig economy services/Substack
• Weird crap you buy on Amazon at 2am

What will you include? The investors are waiting.

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Today’s email was written by Catherine Baab-Muguiracovering money and culture for outlets around the world (love a good layered dip) and edited by Morgan Haefner (more is in sections).

The correct answer to the pop quiz is communication services. We know. It is strange.