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Fallen Angels: Exploring the Deep Cuts of Sector Performance


While 2023 saw the stock market rally to near-record highs, not all sectors danced to the same tune. It wasn't until late in the year that we started to see a broadening of the market start to see some results. Hidden amongst the victors lies a graveyard of underperformance, each tombstone whispering a tale of market anxieties and shifting winds. Some refer a segment of these left behind stocks as the "dogs of the dow". Let's delve into the sectors that faced the brunt of the bearish bite and understand their predicament as we stand on the precipice of 2024.


The Battered Bunch:


1. Utilities (XLU): The supposed haven of stability succumbed to rising interest rates. As the cost of borrowing climbed, the fixed-income nature of utilities' returns turned less appealing, causing investors to seek greener pastures. The sector slumped 10.6%, dragging down giants like NextEra Energy and Duke Energy.


2. Healthcare (XLV): This traditionally defensive sector faced a double whammy. Concerns about Medicare price controls and increased generic drug competition cast a shadow on pharmaceutical stocks. Meanwhile, healthcare providers grappled with labor cost pressures and inflation. The net result? A 4.6% decline, leaving companies like Johnson & Johnson and Merck nursing their wounds.


3. Energy (XLE): Despite initial optimism for a post-pandemic oil boom, the black gold sputtered. OPEC+ production cuts failed to stem the tide, as macroeconomic headwinds and surging inflation dampened demand. Energy behemoths like Exxon Mobil and Chevron retreated 7.3%, leaving investors with a bitter taste of disappointment.



Beyond the Numbers: Digging Deeper

Why the Tumble? Each sector grappled with its own demons:


  • Utilities: Rising interest rates exposed the fixed-income vulnerability, making their returns less attractive compared to other, albeit riskier, assets. Not only that, but it paid - that's right, actually paid to save. What I mean is, bonds, cd's and even money markets were paying 3, 4, and even 5%+. That's important because owners of utilities do so for the consistency of income from this group as well as low volatility.


  • Healthcare: Policy jitters and operational pressures combined to dampen investor sentiment, causing a flight from the sector. It also didn't help that some of the high flying sectors like technology were back in fashion. Defensive type of stocks don't look so sexy when some stocks boasted 50%+ returns.


  • Energy: Geopolitical uncertainties and a slowing global economy choked demand, sending oil prices into a downward spiral, dragging energy stocks along for the ride. Let's not forget how energy performed just a year prior - an astonishing 64%.


Is it time for the Dogs to perform a new trick?


As the wounded licked their wounds, other sectors soared. Technology, for instance, powered by the digital revolution, witnessed a 21.8% surge. The fear of rising rates faded and the tech giants really took off. That only tells one side of things though as this rally was somewhat focused on the glamorous seven stocks that really shined. This disparity highlights the market's selectivity in rewarding future-oriented themes while punishing those anchored in traditional models.


Pricing the Divide: Elevated P/Es and Cautious Optimism

Looking ahead, the scars of 2023 remain etched on valuations. Some high-flying sectors, like technology, trade at elevated price-to-earnings (P/E) multiples, reflecting investor optimism in their growth potential. That means they're more expensive in comparison to some of the more boring value type stocks that are trading at a much cheaper P/E multiple. Lower P/Es, indicate potential value but also lingering anxieties about how they will perform in the near term. Just because things are trading at an elevated P/E multiple doesn't mean they can't go higher. What it does beg to offer is a chance to evaluate your holdings and take some profits off the table. It could be prudent to trim positions and reinvest in areas of opportunity and that's where an advisor can add value.


The Road Ahead: An Uncertain Dance

2024's trajectory remains shrouded in the mist. Inflation, interest rates, and geopolitical tensions will continue to play their intricate ballet, determining which sectors find their rhythm and which remain relegated to the back benches. For investors, navigating this complex landscape requires careful consideration of individual companies within each sector, their unique strengths and vulnerabilities, and a keen eye for both value and growth potential.


As the curtains rise on 2024, the drama of the markets unfolds anew. The fallen angels of 2023 await redemption, while the high-flying sectors face the test of sustaining their lofty valuations. Only time will tell who dances to the music of success and who stumbles under the weight of uncertainty. So, buckle up, investors, and keep your eyes peeled, for the market's next act promises to be a captivating one. I'm not in the camp that rates will be falling throughout the year with numerous rate cuts as many market pundits suggest. TV anchors and analysts alike seem to think the Fed will be cutting rates like their lives depend on it. I just don't see that happening and I'm not so sure rate hikes or cuts are that relevant anymore. It will come down to earnings, earnings, earnings!



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👇Or click below to watch the full Episode



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