2024: Ranking the sectors

As traders and investors navigate a New Year, a certain aspect of the one that just ended may offer some insight into how market dynamics play out in 2024: relative sector performance.

While it’s impossible to predict which sectors will be the biggest gainers or losers, a few simple patterns have tended to play out over the past couple of decades that bear watching.

Take a look at the following table, which shows how S&P 500 annual sector returns ranked from 2002–2023 (1 = strongest, 11 = weakest). The rankings for 2023 show the extent to which investors turned away from the (mostly) defensive sectors that performed best in 2022, instead pushing into “risk-on” tech and consumer discretionary stocks:

The most consistent pattern from year to year was “hot to not”—that is, the tendency for at least one of the leading sectors in a given year to become one of next year’s laggards. While at least one of the top-three sectors in any given year became one of the three weakest the following year (except for 2014-2015 and 2021–2022), 2023 represented a nearly perfect inversion: The top-three sectors from 2022 (energy, utilities, and consumer staples) were the three weakest in 2023, while the three weakest 2022 sectors (communications services, consumer discretionary, and tech) were the strongest in 2023.

If this pattern plays out again, it suggests either tech, communications services, or consumer discretionary has better-than-average odds of being one of the three-weakest sectors this year. Of course, that doesn’t imply a negative annual return, just a smaller return than at least eight other sectors. (Energy and utilities were the only S&P sectors with negative returns last year.)

Finally, the sector with the highest return in one year held on to the top spot the next year only three times (energy in 2004-2005 and 2020-2021, tech in 2019-2020). The other 19 times, the top performer finished the following year no higher than third place, and it was often much lower. That could have some traders wondering how much last year’s leader, tech, could cool off this year—if the pattern repeats.

Today’s numbers include (all times ET): ISM Manufacturing Index (10 a.m.), Job Openings and Labor Turnover Survey (10 a.m.), FOMC minutes (2 p.m.).

Today’s earnings include: Cal-Maine Foods (CALM), Simulations Plus (SLP).

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