History suggests investing in last year’s winners could pay off in the new year. Here are what sectors to buy in 2025.
Transcript:
CONWAY GITTENS: So you mentioned your S&P 500 target. What are some of the most attractive sectors on Wall Street right now?
SAM STOVALL: Well Conway, what’s interesting is that history, I have a lot of investors ask me at the beginning of the year, should I buy last year’s winners or last year’s losers. And history says that depends. If last year was a down year, you want to own last year’s losers. But if last year was an up year and 2024 was an up year, you tend to do much better by letting your winners ride. So since 1990. If you owned the top three sectors in equal amounts in the coming year. That had been the best performers in the prior year, you would have beaten the market 75% of the time, and would have outperformed the market by about 300 basis points per year. So pretty good outperformance.
So with that in mind, you would want to hold on to communication services, consumer discretionary and technology. But I also add the fact that if you are a bit nervous about technology because tech has posted gains in excess of 30% in six of the last eight years. And if you worry, gee, maybe I should add a little bit of defensiveness to my portfolio. Not a bad idea. A portfolio of 50% tech, 50% consumer staples since 1990 has returned 94% of the return of tech alone, but with 40% lower volatility. So for investors who are getting a little bit nervous, this could be a good way of helping them to sleep better at night.
CONWAY GITTENS: What about basic materials. That was the only down sector in 2024. If we are taking the flip side with history encourages us to let your winners ride. Do you let your losers lose?
SAM STOVALL: Yes essentially you do. I was looking at the rolling 12 month relative strength charts that I create for materials, for consumer staples and for health care, and they’ve all done quite poorly, but they are at very low extremes, more than one standard deviation, if not two standard deviations below the mean. So if you are a believer in reversion to the mean, they could be good opportunities to start to nibble. I wouldn’t back up the truck because historically, it takes quite a while for underperformance to really become outperformers because there’s an awful lot of overhead resistance. James O’Shaughnessy, in his book what works on Wall Street, show that you’re better off sticking with high momentum than low momentum areas. But when things have been beaten up that badly, it would be good to start thinking about cherry picking in materials, consumer staples, and health care as potential longer term opportunities.
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