A three sector portfolio for the next three months
Key points
- The stock market is beginning a seasonally favorable three-month period
- Three sectors have stood out as top performers during this favorable period
- Sector ETFs allow traders access to exposure in these sectors
A seasonally favorable period
As highlighted in this article, February through April of pre-election years have a history of being quite favorable for stocks. The chart below displays the growth of $1 in the S&P 500 only during this three-month period out of every four years.
Now let's take a closer look at individual sector performance.
Sector performance during favorable three-month window
The database used for the following test uses the Fama French Index series from 1926 into 1991 and the S&P 500 Sector indexes after that. The table below displays the cumulative gains for each sector if held only during February 1st through April 30th of each pre-election year starting in 1927.
The top-performing sectors have been Materials, Consumer Discretionary, and Technology. Let's see what happens if we put these three together.
A three-sector three-month portfolio
For the following test, we will invest equal amounts in Materials, Consumer Discretionary and Technology only during February through April of the pre-election years since 1927. The portfolio is rebalanced every four years.
The chart below displays the cumulative growth of $1 for the combined sector portfolio.
The table below displays the performance of this three-sector portfolio on a four-year cycle basis.
The most obvious thing to note is that performance was subpar prior to the 1950's and has been terrific thereafter. The portfolio lost ground four times out of six and registered a total gain of a mere +10.3% from 1927 through 1947. Since that time, it has reeled off eighteen consecutive gains. The table below summarizes performance over the past 96 years.
The bottom line: The performance of the past 70+ years suggests a potential "edge" for investors. The performance prior to that reminds us that there are no guarantees regarding any seasonal-based approach.
Trading alternatives
The most obvious choices for a trader looking to play these sectors is via the use of SPYDER ETFs, namely:
- Materials Select Sector SPDR Fund (XLB)
- Consumer Discretionary Select Sector SPDR Fund (XLY)
- Technology Select Sector SPDR Fund (XLK)
The chart below displays the growth of $1 invested equally in the three ETFs listed each February through April of a pre-election year since 1999.
The table below displays the hypothetical cycle-by-cycle P/L for this ETF portfolio versus the S&P 500 Index from February through April of the pre-election year period.
What the research tells us…
The current three-month period has shown a tendency to be bullish for stocks. The three sectors highlighted above have shown a tendency to be leading performers during this period and have tended to outperform the S&P 500 Index in so doing. Nevertheless, real-world caveats remain. Just because the market has tended to perform well during the current period does not guarantee that it will do so this time. Likewise, there is no guarantee that the sectors highlighted will be the leaders in 2023, let alone that they will perform well. Historical tendencies never relieve the investor from their responsibility to a) decide how much capital to allocate to a given idea or b) what action to take - if any - if things do not go as planned.