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Newsletter September 2016

equity overview - new sector joining s&p 500 index

Domestic stock market indices closed at new highs in August as earnings and economic data helped propel equity prices. Even with recent new highs, volume remains relatively low. Some market analysts believe that the increased regulation of banks and brokerage firms has taken a toll on trading. The use of various derivatives have been discouraged by regulators, which have in the past added activity and volume to equity markets.

The positive performance of the high-yield bond sector so far this year is indicative of improving credit characteristics for smaller company stocks. Since most smaller companies tend to rely more on debt for cash flow, a continued low rate environment has been beneficial for earnings and growth.

The S&P 500 index is adding a new sector to its mix. REITs will become part of the S&P 500 compilation on September 16th, making it the 11th sector. The growth and capital representation of REITs in the markets will now formally allow REITs to sit along side the other 10 sectors as a standalone class. REITs have been part of the financial sector for years, but now have earned their own designated category.
REITs have become increasingly popular with investors as their management teams have become more professional and the companies have become larger. There are two main types of REITs, equity REITs and mortgage REITs. The newly added sector will only include equity REITs that own physical property such as apartments, office buildings, industrial buildings, malls, hotels, cellular towers, data storage facilities, self-storage facilities, movie theaters, timber and even prisons.

REITs currently constitute about 3% of the S&P 500, so it is estimated that the newly created 11th sector will make up about 3% of the total index.

Sector weightings comprising the S&P 500 vary as the economy shifts and industries evolve. Technology currently encompasses the largest portion of the S&P 500 at 21%, yet made up as much as 35% in 2000 during the height of the technology boom.

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Sources: S&P, Bloomberg, Global Industry Classification Standard (GICS)