There was only one sector that fit the bill: Healthcare.
As the chart of the relative performance of the Healthcare sector (XLV) to the SPX shows, this sector has been in a well-defined relative uptrend and has shown consistent market leadership qualities. I also show the relative performance of specific industry groups within the sector, namely Biotech (IBB), Healthcare Providers (IHF) and Pharmaceutical (PJP). These industry groups, in all cases, show similar histories of outperformance, though IHF appears to be slightly extended in the short-term (dotted trend line).
Not bubble yet
Having shown such a history of market outperformance, one concern that I had was that Healthcare could be in a bubble and therefore subject to sudden downdrafts as Technology did in 2000 and Financials did in 2008.
A recent Morningstar study addresses this specific issue directly:
When a particular sector outperforms the others, it grows as a percentage of the index and at the expense of its counterparts. But no one sector today is even 20% of the index. Tech stocks come closest, with 19.3% of the index. But this figure is far below the level of 14 years ago when tech claimed 32.6% of the index. Tech stocks have performed particularly well over the past year, gaining about 32% on average, but over the past five years both consumer discretionary/cyclical and health-care stocks have fared slightly better.So there you are. Consistent market leadership that is not yet overdone. For long term market bulls, this sector and its industries might be just what the doctor ordered.
Speaking of health care, even with its strong five-year returns (20% annualized on average), that sector’s weighting is also below its high. While never on par with tech or financials as a share of the index, that group did claim 15.5% of the index in March 2003 versus 13.4% currently.