Best Sectors of “Worst Months” By: Christopher Mistal | May 09, 2024 | Email | Print

Following a rough April, the market has rebounded nicely in the first seven trading days of May to kick off the historically tepid month of May. As of today’s close, DJIA is up 4.16% thus far this May which is its best May start since 1938 when it was up 7.32%. S&P 500 and NASDAQ are also enjoying strong May starts, up 3.54% and 4.40% respectively. For S&P 500 this is its best May start since it gained 4.17% in 2009 while NASDAQ was last stronger in 1997 when it advanced 5.89%. Whether or not this rally has the steam to break out to new all-time highs will likely depend largely on upcoming economic and inflation data. Recent data has shown economic activity cooling and inflation accelerating, a combination that is likely to delay any Fed action with interest rates.

 

 

We have updated the above charts of S&P 500 and NASDAQ election year seasonal patterns through today’s close. Fueled by interest rate cut expectations, the market appears to have gotten ahead of itself and likely has pulled some gains forward while the historical seasonal trend for this time of year is only mildly positive. Absent a breakout to new all-time highs, April’s retreat and May’s gains are representative of the chop and volatility that we still suspect could continue into Q3 and possibly longer. We maintain our outlook for a choppy “Worst Months” followed by a Q4 rally to finish the year.

 

 

In the following table, the performance of the S&P 500 and NASDAQ during the “Worst Six Months” May 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. Except for two indices, 1990-2023, a full 34 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. To make an apples-to-apples comparison, dividends are not included in this study.

 

 

Using the S&P 500 as the baseline by which all others were compared, five indices outperformed during the “Worst Six Months” while ten others, gold and the 30-year Treasury bond underperformed based upon “AVG %” return. At the top of the list are Biotech and Information Technology with average gains of 6.78% and 5.03% during the “Worst Months.” Before jumping into Biotech positions, consider only 29 years of data was available and, in those years, Biotech was up 55.2% of the time from May through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large.

 

 

Runner-up, Information Technology with 34 years of data and a 70.6% success rate is possibly a less risky choice than Biotech. Its 5.06% AVG % performance comes by way of three fewer losses in five additional years of data. However, five of the nine losses were double digit. The worst loss was 30.88% in 2008. Other double-digit losses were in 1990 and 2000-2002. After declining in 2022’s bear market, Information Technology advanced 9.57% last year and has been positive in 10 of the last 11 “Worst Six Months” periods. Holding existing tech-related positions with a trailing stop loss is one option to consider.

 

 

Other “Worst Six” top performers consisted mostly of the usual suspects when defensive sectors are considered. Healthcare and Consumer Staples have bested the S&P 500. Not surprisingly NASDAQ has also performed well, advancing 73.5% of the time with an average gain of 4.65%. NASDAQ’s Best Eight Months include May and June, so it does have an advantage. Although not the best sector by AVG %, Consumer Staples advancing 76.5% of the time is the closest thing to a sure bet for a gain during the “Worst Months.” However, should interest rates rise, as they did last year, Consumer Staples is susceptible to declines. Utilities also merit attention with a second best % Up at 73.5%.

 

 

At the other end of the performance spectrum we have the sectors to consider shorting or to avoid altogether. The S&P 500 Materials sector was the worst over the past 34 years, shedding an average 1.53% during the “Worst Six.” PHLX Gold/Silver was second worst. However, based solely upon the percentage of time up, the stocks only, PHLX Gold/Silver index is the most consistent loser of the “Worst Six” advancing just 38.2% of the time. Aside from solid gains in 2012, 2019 and 2020, PHLX Gold/Silver has declined in nine of the last eleven “Worst Six Months.” NYSE ARCA Natural Gas is the last sector to record a loss, off 0.74%.

 

 

Also interesting to note is every sector, gold and 30-year bonds are all positive in May, on average. It’s not until June when things begin to fall apart for many sectors of the market and the market itself. July tends to see a broad bounce, but it tends to be short-lived as 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 34 years. Only Biotech, 30-year bonds and gold (futures and gold & silver stocks) manage to post gains in both August and September.

 

Based upon “% Up” Consumer Staples is the top sector of the “Worst Six Months” while Gold/Silver mining stocks are the worst. Historically speaking, May looks like a great time to consider rebalancing a portfolio as you will likely be closing out long positions into strength. Short trade ideas are also worth considering given June’s nearly across-the-board poor performance.

 

 

In consideration of the above we will look to add new positions in SPDR Consumer Staples (XLP) and SPDR Healthcare (XLV) on dips to the Sector Rotation ETF Portfolio. For tracking purposes, XLP will appear twice in the portfolio. We will track the trade that began last October for the “Best Months” separately from this “Worst Months” trade. XLP can be considered on dips below $76.20 and XLV can be considered on dips below $140.50.