The U.S. Stock Market's Beat-down Sectors Get Some Revenge in the First Week of 2024

In the early days of 2024, previously downtrodden sectors in the U.S. stock market are experiencing a promising resurgence. Defensive areas such as utilities and healthcare have emerged as top performers during the initial trading week of the year. This positive trajectory contrasts with growth stocks, particularly those in technology-related sectors, which have contributed to a decline in the S&P 500 and the Nasdaq Composite, ending the indexes' nine-week winning streaks as they make their debut in 2024.

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The utility and healthcare sectors within the S&P 500 have notably excelled, posting gains of 1.8% and 2.1%, respectively, during the first week of January. The S&P 500 utilities sector achieved its most substantial weekly advancement in nearly two months, while the healthcare sector marked its eighth consecutive week of growth, its lengthiest winning streak since December 27, 2019, according to Dow Jones Market Data.

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These sectors, which faced challenges and stagnation in 2023, have outperformed the growth-related S&P 500 sectors by the widest margin in the initial week of 2024. Specifically, the S&P 500 utilities and consumer-staple sectors surpassed the information-technology sector, the best-performing part of the broader index in 2023, by their widest weekly margins since November 2022.

Additionally, the S&P 500 utilities sector outperformed the consumer-discretionary sector by its largest margin in nine months, while the healthcare sector demonstrated its superiority over the information-technology sector by the widest margin since April 2022, according to Dow Jones Market Data.

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Investors often view the performance of stocks in January, especially within the first five trading days, as an indicator of the overall stock market performance for the new year. The question arises whether this early-year sector rotation is a transient occurrence or signifies the expansion of the stock-market rally driven by the "Magnificent Seven."

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However, uncertainties loom over these recovering stocks, and their outlook remains cloudy. Jerry Braakman, president and chief investment officer of First American Trust, suggests that the clarity on the future of the Federal Reserve's monetary-policy path is crucial for the resolution of these uncertainties. Predicting the course of 2024 is challenging unless investors can gain insights into the Fed's actions.

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Similar to technology stocks being affected by uncertainties around the Fed's interest-rate path, defensive sectors like utilities are also sensitive to changes in interest rates. Utilities stocks, often considered dividend-income investments or defensive holdings, may lose appeal to investors if Treasury yields rise or if rates on money-market funds increase, making dividend payouts less attractive.

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For instance, the unexpected surge in interest rates in 2023 caught utility stocks off guard. With the 10-year Treasury yield reaching around 5% in October, the utilities sector was expected to offer a dividend yield of only 3.3%, making it less attractive compared to government debts and increasing the company's financing costs, as noted by John Luke Tyner, portfolio manager at Aptus Capital Advisors.

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Tyner emphasizes that the rebound in defensive stocks depends on various economic situations and circumstances. He further notes that some utility companies face challenges in passing through price increases promptly due to the highly regulated nature of the industry.

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While several lagging sectors from 2023 have demonstrated a turnaround in the first week of the new year, not all have followed suit. The Russell 2000 index, a segment of the stock market that struggled in 2023 but finished in the green, declined by 3.8% in the first week of 2024.

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Closing the week on a lower note, U.S. stocks experienced declines, with the S&P 500 falling by 1.5%, marking its worst week in over two months. The Nasdaq Composite also tumbled by 3.3% during the week, while the Dow Jones Industrial Average was down by 0.6%, according to data.