The significance of sectoral composition in recent stock market developments

From end-1995 to March 2000 the stock market indices of the main international bourses rose sharply. Their value multiplied over this period by a factor of between 2.5 and 3.5. March 2000 marked a turning point for this rising trend, giving way to a continuous decline which has led indices to lose around half their value (see Chart 1). Following these corrections, the indices in most markets stood at end-2002 at levels last observed in 1997. The Spanish markets have proven no exception to this general trend. Between 31 March 2000 and 31 December 2002, the Madrid Stock Exchange General Index (MSEGI) tumbled by 41.5%, a lesser reduction than was the case for the Euro Stoxx Index (53.3%), comprising euro area companies, and similar to that of the S&P 500 (41.3%), made up of US corporations. Although the performance of most sectors has been unfavourable, the intensity of the fall in share prices has been uneven. The biggest declines have been in telecommunications, technology and media stocks. Insofar as the performance of share prices has differed greatly from sector to sector, it is worth enquiring whether the sectoral composition of indices may account for the smaller slide on Spanish markets when set against their European counterparts and the greater fall on the latter compared with US markets. Against this background, this article studies the contribution of the different sectors to the reduction in indices in Spain, in the euro area and in the United States. It also analyses the significance of composition effects when explaining the differing performances of indices.