What to make of 2024's winners and losers in 2025

Sam Stovall, Chief Investment Strategist at CFRA Research, joins TheStreet to discuss what to make of the market's winners and losers from 2024.

Transcript

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.