The previously struggling sectors in the U.S. stock market have started the new year with a promising outlook.
Defensive sectors like utilities and healthcare have experienced a strong performance in the first trading week of 2024. On the other hand, growth stocks, particularly those in technology-related sectors, have dragged down both the S&P 500 and the Nasdaq Composite, putting an end to their nine-week winning streaks.
In the first week of January, the S&P 500 utilities and healthcare sectors have emerged as top performers in the large-cap benchmark index, showing increases of 1.8% and 2.1% respectively. Notably, the S&P 500 utilities sector also achieved its best weekly advance in nearly two months. Moreover, the healthcare sector has maintained its winning streak for eight consecutive weeks, the longest since December 27, 2019, according to Dow Jones Market Data.
These sectors, which had experienced declines or stagnation in 2023, have outperformed the growth-related sectors of the S&P 500 by a considerable margin in the first week of 2024.
Specifically, the S&P 500 utilities and consumer-staple sectors have surpassed the information-technology sector, which was the top-performing sector in 2023 but faced a decline of over 4% this week. This margin is the largest since November 2022, as per Dow Jones Market Data.
Furthermore, the S&P 500 utilities sector has outpaced the consumer-discretionary sector with its largest margin in nine months. Similarly, the healthcare sector has outperformed the information-technology sector by its widest margin since April 2022.
The performance of stocks in January, particularly during the first five trading days, is often seen as an indicator of the overall stock market performance for the year ahead. Investors are now wondering if this sector rotation signifies a broader rally beyond the "Magnificent Seven" stocks.
Despite the positive outlook, the uncertainties surrounding these once-struggling sectors cannot be ignored. The Federal Reserve's monetary-policy path for 2024 plays a crucial role in determining their fate, and investors are eagerly awaiting further insight into the future, stated Jerry Braakman, president and chief investment officer of First American Trust.
Nasdaq's Longest Losing Streak in Over a Year
The Nasdaq started 2024 with a disappointing performance, as it faced its longest losing streak in more than a year. There are several factors that have contributed to this decline.
Defensive Sectors and Interest Rate Changes
Just like technology stocks, defensive sectors like utilities are also affected by changes in interest rates. Utility stocks are often seen as dividend-income investments or defensive holdings, particularly during economic downturns or recessions. However, when Treasury yields rise or money-market fund rates increase, the attractiveness of dividend payouts from utility stocks diminishes for investors.
Unexpected Impact of Higher Interest Rates in 2023
In 2023, the surge in interest rates caught utility stocks off guard. With the 10-year Treasury yield reaching around 5% in October, the utilities sector was only expected to offer a dividend yield of 3.3%. This made it less appealing compared to government debts and raised financing costs for utility companies, as stated by John Luke Tyner, a portfolio manager at Aptus Capital Advisors.
Uncertain Outlook for Defensive Stocks
According to Tyner, the rebound of defensive stocks relies heavily on various economic situations and circumstances. Their performance remains uncertain, which further adds to the concerns surrounding these stocks.
Challenges Faced by Utility Companies
Tyner also mentioned that utility companies face challenges because they have limited ability to pass on price increases quickly, due to strict industry regulations.
Small-Cap Stocks Take a Turn
Although not all underperforming stocks of 2023 have turned around in the first week of the new year, small-cap stocks show promise for 2024. The Russell 2000 index, which had underperformed major stock indexes in 2023, experienced a slump of 3.8% this week.
Overall Stock Market Performance
U.S. stocks had a challenging week, with the S&P 500 experiencing its worst week in over two months as it dropped 1.5%. The Nasdaq Composite fell by 3.3% and the Dow Jones Industrial Average was down 0.6% during the same period, according to FactSet data.
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