Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: We’ve mentioned the old saying of “As goes January, so goes the year…” but in this week’s Sector Watch, you took a look at the sectors and sub-industries of the S&P 500 to see if the January Barometer proved accurate on a deeper level. What did you find?
Stovall: It’s just a reminder that the January Barometer holds up under deeper scrutiny. Since 1945, whenever the S&P 500 rose for the month of January, it continued to rise for the remaining 11 months of the year 84 percent of the time and posted an average 11-month advance of 11.2 percent. Whenever the market was down in January, the subsequent 11 months gained only 0.1 percent on average, and the frequency of decline was 44 percent. Certainly that isn’t enough to say it’s an overwhelming frequency of decline, but it is a lot more than whenever you had an up January.
With that in mind, I wondered that if the market’s performance in January gives an idea as to how well the market itself will do for the remainder of the year, could the same hold true for the sectors and the sub-industries within the S&P 500? The answer was a definite, “Yes”.
Since 1990, which is as far back as we have sector-level data for the S&P 500, if you had purchased the three best-performing sectors based on their January performances at the beginning of February and held them for 12 months, the compound rate of growth for these three was 8.2 percent versus 7.5 percent for the S&P 500. This grouping of sectors beat the market a little more than 60 percent of the time. If you look to the 10 best-performing sub-industries of the S&P 500--and here we can go back to 1970--what we find is that a compound rate of growth of 14.3 percent for the sub-industries versus 7.3 percent for the S&P 500, and the 10 industries on average beat the market almost 70 percent of the time. So “As Goes January…” seems to work not only for the market, but for sectors and sub-industries as well.
EQ: For investors who like to play rebounds, how did the underperformers and laggards hold up?
Stovall: A lot of people like to buy last year’s losers or the groups that were beaten down. Yet, what I find is that with momentum strategies—whether they are short term or intermediate term—the groups that were beaten down were beaten down for a reason, and they tend to stay lower. Since 1990, if you were to purchase the three worst-performing sectors based on their January performances alone, the compound rate of growth for the coming 12 month period was 5.0 percent, versus 7.5 percent for the overall market. Also, the three worst sectors only beat the market 48 percent of the time. In terms of sub-industries, while the market gained 7.3 percent, the 10 worst performers in the month of January gained only 4 percent in the subsequent 12 months, and beat the market only 40 percent of the time. So history says, but certainly does not guarantee, that at least when it comes to the January Barometer, you’re better off sticking to the winners and avoiding the losers.
EQ: You also noted that there may not be ETFs that track some of the best-performing sub-industries in the S&P 500. What’s the possible alternative?
Stovall: What they can do is look toward companies to serve as proxies for the overall sub-industries. So I looked at each of the 10 sub-industries that were the best performers for the month of January, and I came up with one stock that was found in that industry based upon their S&P STARS (analyst driven recommendations), as well as look as the S&P Fair Value (quantitatively driven investment recommendations). So these are the stocks that I came up with to serve as proxies for their respective sub-industries:
- Computer & Electronics Retail – GameStop Corp. (GME)
- Health Care Facilities – Universal Health Services, Inc. (UHS)
- Homebuilding – NVR, Inc. (NVR)
- Investment Banking & Brokerage – Morgan Stanley (MS)
- Life Sciences Tools & Services – Thermo Fisher Scientific, Inc. (TMO)
- Office Electronics – Xerox Corp. (XRX)
- Office Services & Supplies – Avery Dennison Corp. (AVY)
- Oil & Gas Refining & Marketing – Valero Energy Corp. (VLO)
- Specialized Consumer Services – H&R Block, Inc. (HRB)
- Trucking – Ryder System, Inc. (R)
EQ: Were there any particular sectors that stood out with more sub-industries among the best performers?
Stovall: What’s interesting is Consumer Discretionary (XLY) had a few representatives such as Computer & Electronic Retail, Homebuilding, and Specialized Consumer Services. Health Care (XLV) had two in Health Care Facilities, and Life Sciences Tools and Services. So it seems to be a relatively good among the Consumer Discretionary, Health Care, Financials (XLF), Industrials (XLI), and Energy (XLE) sectors.
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