January is often thought of as a good month for stocks, but historical data indicate otherwise.
The first month of the year is not really bad for equities either, but over the past 20 years, the S&P 500 has lost an average of a tenth of a percent in January, according to EquityClock.com.
Additionally, the S&P 500’s win rate is just 55% in January over those 20 years, so it is not unreasonable to consider playing some defense at the sector level heading into January 2017. January 2016 taught investors that lesson.
“Last January, the Dow Jones Industrial Average lost 8.1% in the first 10 trading days of the year. That was the worst performance to start a year ever, going back to 1897,” according to ETF Daily News.
After soaring to start 2016, the Utilities Select Sector SPDR (NYSEArca: XLU) was nearly written off by investors as high beta stocks came into focus in the third quarter and as markets priced in rising expectations for a December rate hike by the Federal Reserve, a scenario that could come to pass today.
The fortunes of the utilities sector seem to be tied to the Federal Reserve’s interest rate outlook.
Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
Related: Will the Utilities ETF Sector Keep Shining?
Still, it cannot be ignored that XLU, the largest utilities ETF, is up 3.4% over the past week and nearly 5% over the past month.
The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures. Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
In January 2016, “the S&P 500 Index lost 4.8% over the same time period, and was down over 11% at its lowest point that month. Utilities and Consumer Staples are generally considered defensive shelters for when the market goes sour, and they held up that role during last year’s selloff,” reports ETF Daily News.
For more information on defensive ETFs, visit our defensive ETF category.