US Stock Market Sectors

Interpretation

The chart above gives a different view of the same data from the ratios above. Presented below are brief sector descriptions along with some example companies.

• Energy Sector: This sector includes companies involved in the exploration, production, refining, and distribution of oil, gas, and other energy sources. Example companies: Exxon Mobil, Chevron, ConocoPhillips.
• Materials Sector: This sector encompasses companies involved in extracting and processing raw materials. This includes metals, chemicals, and construction materials that are foundational to manufacturing and construction industries. Example companies: Linde PLC, Sherwin-Williams, Freeport-McMoRan.
• Industrials Sector: This sector comprises companies involved in manufacturing, construction, transportation, and industrial services. Example companies: Caterpillar, Union Pacific, Boeing, General Electric.
• Utilities Sector: Companies in this sector provide essential services like electricity, gas, and water supply. Example companies: NextEra Energy, Southern, Duke Energy.
• Healthcare Sector: This sector includes companies involved in healthcare-related activities, such as pharmaceuticals, medical equipment, and healthcare services. Example companies: UnitedHealth Group, Eli Lilly, Johnson & Johnson, Merck.
• Financials Sector: Companies in this sector provide financial services, including banking, insurance, and asset management. Example companies: Berkshire Hathaway, JPMorgan Chase, Visa, Mastercard, Bank of America, Wells Fargo.
• Consumer Discretionary Sector: This sector produces goods and services considered non-essential but desirable if consumers have the disposable income. It covers retail, automobiles, and leisure, often seen as a reflection of consumer confidence and economic health. Example companies: Amazon, Tesla, Home Depot, McDonald's, Nike.
• Consumer Staples Sector: Companies in this sector produce and distribute essential consumer products like food, beverages, and household items. Example companies: Procter & Gamble, Costco, PepsiCo, Coca-Cola, Walmart.
• Information Technology Sector: This sector comprises companies involved in technology development, software, hardware, and IT services. Example companies: Microsoft, Apple, Broadcom, Nvidia, Adobe.
• Communication Services Sector: This sector includes companies involved in communication and media services, including telecommunications and entertainment. Example companies: Meta, Alphabet, Netflix, T-Mobile, Electronic Arts.
• Real Estate Sector: This sector includes companies involved in real estate development, management, and investment. Example companies: Prologis, American Tower, Equinix, Crown Castle.

Interpretation

This heatmap shows how different sectors of the US stock market—like Technology, Health Care, and Energy—move in relation to each other. Red squares indicate a positive correlation (sectors moving together), while blue shows a negative correlation. As expected, most sectors are positively correlated, as they are all part of the broader US economy.

Understanding these relationships is useful for sector rotation and diversification. Sectors with lower correlations, such as Utilities or Energy, can help balance a portfolio that is heavily weighted in more cyclical areas like Technology or Financials. This is a domestic application of Ray Dalio's principle of using uncorrelated assets to reduce risk.

To create this chart, weekly returns are calculated for each sector index, and the Pearson correlation is computed for every pair. The heatmap is then organized using hierarchical clustering to group sectors with the most similar performance, revealing the underlying structure of the US market.

Interpretation

The Minimum Spanning Tree (MST) simplifies the correlation matrix by showing only the strongest connections between sectors. If two sectors are linked, they have a strong positive correlation and tend to move in tandem. This helps identify clusters of related assets and is useful for portfolio diversification.
The tree is constructed by converting the correlations into distances and then finding the set of connections that links all sectors with the minimum total distance. As noted by Marti, Gautier, et al. (2017), the optimal Markowitz portfolio is often found at the tree's outskirts, and the tree tends to shrink during a financial crisis.

Data Sources

• Yahoo: SPDR S&P 500 ETF Trust (SPY)
• US Stock Market Sectors:
• Yahoo: Energy Select Sector SPDR Fund (XLE)
• Yahoo: Materials Select Sector SPDR Fund (XLB)
• Yahoo: Industrial Select Sector SPDR Fund (XLI)
• Yahoo: Utilities Select Sector SPDR Fund (XLU)
• Yahoo: Health Care Select Sector SPDR Fund (XLV)
• Yahoo: Financial Select Sector SPDR Fund (XLF)
• Yahoo: Consumer Discretionary Select Sector SPDR Fund (XLY)
• Yahoo: Consumer Staples Select Sector SPDR Fund (XLP)
• Yahoo: Technology Select Sector SPDR Fund (XLK)
• Yahoo: Communication Services Select Sector SPDR Fund (XLC)
• Yahoo: The Real Estate Select Sector SPDR Fund (XLRE)