In January, investors endured the anguish typically experienced while watching a hotly contested horse race, where the lead changed hands multiple times only to have your favorite horse falter at the finish line.
As a result, a down January implies that uncertainty will likely rule in 2020. Yet January also has been a good predictor of 12-month results for sectors and sub-industries in the S&P 500.
Since 1990 the S&P 500 posted a 12-month (January 31 to January 31) compound annual growth rate (CAGR) of 7.9% for all years, while an equal weighting of the three best performing sectors in January, held until the end of the following January, posted a CAGR of 8.8% and outpaced the market in nearly two out of every three years.
The three worst performing sectors in January, on the other hand, continued to under-perform the benchmark in the subsequent 12 months, rising an average 6.0% in price and beating the market only 47% of the time.
Digging a bit deeper, the 10 best sub-industries in January also went on to outpace the market in the coming 12-months since 1990, posting a CAGR of 11.5% and beating the S&P 500 55% of the time.
This year’s three best performing sectors in January were Information Technology, Real Estate and Utilities, while the three worst were Energy, Financials, and Materials.
Finally, the 10 best-performing S&P 500 sub-industries were Application Software, Homebuilding, Diversified Support Services, Electric Utilities, Environmental & Facilities Services, Financial Exchanges & Data, Internet Services & Infrastructure, Metal & Glass Containers, Systems Software, and Water Utilities. Should history repeat itself, and there’s no guarantee it will, the average 12-month returns for these top sectors and sub-industries should outpace that for the broader benchmark.