Why stocks in the same sector move together
Different companies that share the same risk factor react the same way to a single piece of news.
Same factor, same direction
Chipmakers don't necessarily compete with one another, but they all depend on the same demand cycle, the same factories and often the same customers. When news about chip demand comes out, they all move.
The same goes for banks and interest rates, for airlines and the price of oil, for homebuilders and the cost of borrowing.
This isn't imitation or panic. It's simply the fact that each company's price depends on a shared variable.
Why it matters to you
If you own five tech companies, you don't have five investments — you have more or less one investment repeated five times. Diversification needs things that depend on different factors, not just different names.
It's also why a sector ETF isn't safe just because it's an ETF. A hundred companies in the same industry can fall together just like one.
When you look at a portfolio, the useful question isn't “how many things do I own?” but “how many different factors do they depend on?”.
Rotation between sectors
At different stages of the economic cycle, money moves regularly from one sector to another. When rates rise, growth stocks suffer and banks benefit. When the economy slows, utilities and consumer staples hold up better.
This movement is called sector rotation, and it explains why the market can look calm while, beneath the surface, half of it is rising and half is falling.
You don't have to predict it. It's enough to recognise it, so you don't mistake a rotation for a crisis.
Key terms in this lesson
- Sector
- A group of companies that depend on the same economic forces.
- Sector rotation
- Money moving from one sector to another as the economic cycle changes phase.
- Concentration
- How much your portfolio depends on a single factor, regardless of how many names are in it.
Quick check
You own five different tech companies. How diversified are you really?
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