Beaten-down sectors in U.S. stock market last year get some revenge in the first week of 2024

The S&P 500 utilities
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and healthcare sectors
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are two of the best-performing sectors in the large-cap benchmark index in the first week of January, up 1.8% and 2.1%, respectively. The S&P 500 utilities sector also booked its best weekly advance in nearly two months, while the healthcare sector rose for an eighth straight week, its longest weekly winning streak since Dec. 27, 2019, according to Dow Jones Market Data. 

These roughed-up corners of the market, which finished 2023 either deep in the red or flat, also outperformed the growth-related S&P 500 sectors by the widest margin in the first week of 2024.

The S&P 500 utilities and the consumer-staple sectors
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outperformed the information-technology sector
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which was the best-performing part of the broader index in 2023 and slumped over 4% this week, by their widest weekly margins since November 2022, according to Dow Jones Market Data. 

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

Investors often see stocks’ performance in January, especially during the first five trading days, as a barometer of the overall performance of the stock market in the new year. Many have pondered whether the early-year sector rotation marks a blip, or if that means the “Magnificent Seven”-driven stock-market rally is finally starting to broaden out. 

However, the clouds over these beaten-down stocks aren’t expected to clear unless investors can peer into their “crystal balls” to see what 2024 has in store for the Federal Reserve’s monetary-policy path, Jerry Braakman, president and chief investment officer of First American Trust, told MarketWatch via phone.

See: The Nasdaq kicked off 2024 with its longest losing streak in over a year. This is what is driving it lower. 

Just like technology stocks being rattled by uncertainties around the Fed’s interest-rate path earlier this week, some defensive sectors, such as utilities, are also sensitive to changes in interest rates. That is because utilities stocks are often considered dividend-income investments or defensive holdings, especially during economic downturns or recessions. However, a rising Treasury yields or higher rates on money-market funds could make dividend payouts from utility stocks less attractive to investors.

For example, higher-for-longer interest rates caught utility stocks off guard in 2023. With the 10-year Treasury yield hovering around 5% in October, the utilities sector was expected to pay a dividend yield of merely 3.3%, making it less enticing compared with the government debts and increasing the company’s financing costs, said John Luke Tyner, portfolio manager at Aptus Capital Advisors. 

“It [the rebound in defensive stocks] really depends on a lot of situations and circumstances with what happens to the economy,” said Tyner, in a phone interview with MarketWatch on Friday. 

Tyner also said that some of the utility companies don’t have the ability to pass through price increases as fast as other sectors because the industry is highly regulated. 

See: Beaten-down small-cap stocks are roaring back. Why they could soar in 2024.

Of course, not every laggard in 2023 turned around in the first week of the new year. The Russell 2000 index
RUT,
a long-suffering section of the stock market which finished 2023 in the green but still underperformed the major stock indexes, slumped 3.8% this week.

U.S. stocks finished the week lower on Friday, with the S&P 500 down 1.5% to suffer its worst week in over two months. The Nasdaq Composite
COMP
tumbled 3.3% this week, while the Dow Jones Industrial Average
DJIA
was off 0.6% over the same period, according to FactSet data.