Sam Stovall, Chief Investment Strategist at CFRA Research, joins TheStreet to discuss what to make of the market's winners and losers from 2024.
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00:00So you mentioned your S&P 500 target. What are some of the most attractive sectors on Wall Street
00:05right now? Well, Conway, what's interesting is that history, you know, I have a lot of investors
00:12ask me at the beginning of the year, should I buy last year's winners or last year's losers?
00:17And history says that depends. If last year was a down year, you want to own last year's losers.
00:24But if last year was an up year and 2024 was an up year, you tend to do much better by letting
00:32your winners ride. So since 1990, if you owned the top three sectors in equal amounts in the coming
00:41year that had been the best performers in the prior year, you would have beaten the market 75%
00:47of the time and would have outperformed the market by about 300 basis points per year.
00:53So pretty good outperformance. So with that in mind, you would want to hold on to communication
01:00services, consumer discretionary and technology. But I also add the fact that if you are a bit
01:08nervous about technology because tech has posted gains in excess of 30% in six of the last eight
01:17years, and if you worry, gee, maybe I should add a little bit of defensiveness to my portfolio,
01:23not a bad idea. A portfolio of 50% tech, 50% consumer staples since 1990 has returned 94%
01:33of the return of tech alone, but with 40% lower volatility. So for investors who are getting a
01:41little bit nervous, this could be a good way of helping them to sleep better at night.
01:45What about basic materials? That was the only down sector in 2024.
01:51If we are taking the flip side where history encourages us to let your winners ride,
01:54do you let your losers lose? Yes, essentially you do. I was looking at the rolling 12-month
02:01relative strength charts that I create for materials, for consumer staples and for health
02:10care, and they've all done quite poorly, but they are at very low extremes, more than one
02:17standard deviation, if not two standard deviations below the mean. So if you are a believer in
02:23reversion to the mean, they could be good opportunities to start to nibble. I wouldn't
02:29back up the truck because historically it takes quite a while for underperformers to really become
02:35outperformers because there's an awful lot of overhead resistance. James O'Shaughnessy in his
02:42book, What Works on Wall Street, showed that you're better off sticking with high momentum
02:48than low momentum areas. But when things have been beaten up that badly, it would be good to
02:54start thinking about cherry-picking in materials, consumer staples and health care as potential
03:02longer-term opportunities.