Top Performing Sectors of the “Worst Four Months”
By: Christopher Mistal
July 09, 2020
This year has proven to be challenging for seasonality as the market was forced to endure a country-wide economic shutdown in response to the coronavirus pandemic. DJIA and S&P 500 “Best Six Months” were negative however, NASDAQ’s “Best Eight Months” were positive. After steep losses in February and March and the shortest bear market in history, major indexes rebounded sharply in April, May and June with technology stocks leading throughout. Tech strength has persisted into July and NASDAQ’s mid-year rally has been a success so far (up 5.3% as of today’s close) with three days remaining in the twelve-day span.
But, the growing weight of surging coronavirus cases across numerous U.S. states appears to be increasingly burdening tech leadership and its momentum. Even though NASDAQ has broken out to new all-time highs, DJIA and S&P 500 have been struggling since early June. Once NASDAQ’s mid-year rally comes to a close, it too could succumb to negative headlines and generally mixed economic data. At which point the broader market could weaken further as well.
In the following table, the performance of S&P 500 and NASDAQ during the “Worst Four Months” July to October is compared to fourteen select sector indices or sub-indices, gold and the 30-year Treasury bond. Nine of the fourteen indices chosen are S&P Sector indices. Gold and 30-year bond are continuously-linked, non-adjusted front-month futures contracts. With the exception of two indices, 1990-2019, a full 30 years of data was selected. This selection represents a reasonably balanced number of bull and bear years for each and a long enough timeframe to be statistically significant while representing current trends. In an effort to make an apples-to-apples comparison, dividends are not included in this study.
[Various Sector Indices & 30-Year Treasury Bond versus S&P 500 during Worst Six Months May-October Since 1990 table]
Using the S&P 500 as the baseline by which all others were compared, six sector indices or sub-indices, 30-year Treasury bond futures, gold futures and NASDAQ outperformed during the “Worst Four Months” while eight others underperformed based upon “AVG %” return. At the top of the list are Biotech and Information Technology with average gains of 4.59% and 3.35% during the “Worst Months.” However, before jumping into Biotech positions, only 25 years of data was available and, in those years, Biotech was up just 56.0% of the time from July through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large. The race to produce a coronavirus vaccine is likely to give the sector a boost this year, but in the end, there will likely be only one company that accomplishes this first. That company’s shareholders are likely to be rewarded while runners-up may not be as fortunate.
[Biotech mini-table]
In second-place, Information Technology with 30 years of data and a 70.0% success rate is probably a safer choice than Biotech. Its 3.35% AVG % performance comes by way of two fewer losses in five additional years of data. Four sizable double-digit losses since 1990 are indicative of the sectors potential volatility and the only meaningful blemish on an otherwise fairly solid track record.
[Information Technology mini-table]
Other “Worst Four” top performers consisted mostly of the usual suspects when defensive sectors are considered. Consumer Staples, 30-year Treasury bonds and Utilities all bested the S&P 500. Gold futures, Healthcare and Financials also bested the S&P 500, but % Up was not as favorable. Although not the best sector by AVG %, Utilities advancing 70.0% of the time with a worst single-year loss of 7.88% is the closest thing to a sure bet for success during the “Worst Four Months.” 
[Utilities mini-table]
At the other end of the performance spectrum we have the sectors to consider shorting or to avoid altogether. The Natural Gas sector, represented by NYSE ARCA Natural Gas index, was the worst over the past 30 years, shedding an average 2.27% during the “Worst Four.” Consumer Discretionary, Telecommunication Services, Materials and PHLX Gold/Silver also recorded average losses. Based solely upon the percentage of time up, Telecommunication Services is the most consistent loser of the “Worst Four” advancing just 46.7% of the time.
[NYSE ARCA Natural Gas index mini-table]
Interesting to note is the fact that only three sectors/indices fail to advance in July and October, on average. July is the first month of the second half of the year and tech’s mid-year rally gives it a bullish tailwind. August and September tend to be downright ugly on average. It is this window of poor performance that has given October a lift in the past 30 years. Only Biotech, gold futures, 30-year bonds, utilities and gold & silver stocks manage to post gains in both August and September.
Based upon “% Up” during the “Worst Four Months,” Consumer Staples and Utilities look like the best place to be. Both sectors have beaten the S&P 500 while being relatively less volatile. If maximum return is your goal, and volatility can be tolerated, Biotech and Information Technology are the way to go. The disconnect in performance between gold futures and gold & silver stocks suggests that the physical metals may be the best place to be during times of economic uncertainty and/or broad equity weakness.