Just like people, stock market sectors seem to have their own personalities, with some sectors exhibiting much more volatility than others. Some sectors bounce around over the short term, with prices fluctuating rapidly up and down like a yo-yo. Other sectors are relatively docile and move more slowly, with small changes in prices at a steady pace over long periods of time. In this article, we'll discuss the 8 stock market sectors representing the industries that have shown the most volatility over a sustained period of time.

Key Takeaways

  • Some securities markets are more volatile than others, exhibiting large price swings in either direction over a period of time.
  • Volatility in the market sectors has many causes, including investor emotions, depressed economic conditions, inflation, deflation, and bankruptcies of major industries.
  • Standard deviation is a mathematical calculation used to measure an investment's volatility.
  • The sector with the most volatility in the 2010s (the period between Dec. 31, 2009 and Dec. 31, 2019) was the energy sector, which was impacted by the wide fluctuations in oil prices.

What Causes Sector Volatility?

Volatility may be caused by a variety of factors—among them are trader emotions like fear and panic. Sometimes referred to as "noise trader risk," this is the risk associated with trend-following traders who succumb to their emotions, causing massive sell-offs or buying sprees. In a jittery, uncertain market with nervous investors, major news events, both positive and negative, can cause big price moves, either down or up.

Wars, revolutions, famines, droughts, strikes, political unrest, recessions, depressions, inflation, deflation, bankruptcies of major industries, and fluctuations in supply and demand can all cause stock prices to drop precipitously.

Some big hedge funds and private equity firms, with excessive debt incurred due to financing stock market investments, have been forced to sell assets in a declining market to pay off margin calls. These large-lot sales also cause big swings in stock prices.

According to research from S&P Global, the most volatile market sectors during the 2010s (the period between Dec. 31, 2009 and Dec. 31, 2019) were those that felt the most impact from rapid changes in oil prices. Here we list in descending order the top 8 sectors with the highest standard deviations.

Standard deviation is a calculation applied to the annual rate of return of an investment and measures the investment's volatility.

Energy

Industries in this sector include oil, gas, coal, and renewable energy technologies such as biomass, geothermal, hydrogen, hydro-electric power, ocean energy, solar, and wind energies. During the 2010s, this sector had the highest standard deviation of 20.3% based on returns from the Energy Select Sector Index (XLE).

This sector saw peak volatility in oil prices during the decade with the spot price for crude oil plummetting from $113.93 per barrel on April 29, 2011, to $88.19 on Sept. 12, 2011.

Commodities

Coming in with the second-highest standard deviation of 18.6% for the decade is the commodities sector. Commodities are a range of physical goods including natural resources, precious metals, and agricultural goods. If you were to invest in this sector through a commodities exchange-traded fund (ETF), your holdings might include exposure to such products as gold, silver, oil, gas, grains, or beef.

Financial

Banks, brokerage firms, financial services, insurance companies, credit card issuers, financial planners, securities exchanges, and commodity exchanges form the bulk of this sector. This sector experienced tremendous volatility during the 2007-2008 financial crisis and the Great Recession that followed. For the 2010s, the financial sector's standard deviation came in third highest at 16.8%.

Technology

The technology sector ranked fourth in S&P Global's list of sectors with the most volatility, coming in with a standard deviation of 14.8%. The technology sector includes a wide range of goods and services. On the consumer side, it includes goods like personal computers, mobile phones, televisions, and household appliances. For businesses, the sector provides hardware, enterprise software, cloud-based computing, and logistics systems. Well-known companies in this sector include Apple, Amazon, Google, and Microsoft.

Consumer Discretionary

The consumer discretionary sector came in close behind the technology sector with a standard deviation of 14.6%. Included within this sector are retailing, media, consumer services, consumer durables, luxury goods, apparel, automobiles, and auto parts. Additional industries in the consumer discretionary sector include hotels, restaurants, and leisure.

Communication Services

The communication services sector ranks next with a standard deviation of 14.1% in the 2010s. The major companies in this sector include phone services, wireless communications services, cable providers, data services, Internet services, equipment manufacturers, media, and entertainment. Companies in the Communication Services Select Sector Index (XLC) include Facebook (FB), Alphabet (GOOG), Netflix (NFLX), The Walt Disney Company (DIS), and AT&T (T).

Health Care

During the 2010s, this sector experienced volatility of 12.4% based on returns from the Health Care Select Sector Index. This broad sector includes hospitals, physicians, dentists, medical equipment, supply manufacturers, and vendors. Investors in the health care sector might invest in a variety of health care companies, including pharmaceutical and biotech companies, health insurance companies, or pharmacy benefit managers (PBMs).

Utilities

Last on our list is the utilities sector, which experienced a standard deviation of 11.8% in the 2010s. Companies in this sector provide public services such as water, sewage services, electricity, dams, and natural gas. Utilities are generally considered a less volatile sector compared to the others on this list. The companies in this sector are heavily regulated and generally provide investors with dividends. Long-term investors will purchase utility stocks for their overall stability and income stream.

The Bottom Line

The stock market typically moves upward over time in small increments. Any deviation in the price of a stock from this expected pattern, either up or down, is the volatility factor. Volatility often frightens investors. The prudent investor prefers a stable, predictable market in which stock prices move as expected and volatility is at a minimum.