3 Beaten Down Sectors to Own in 2024 – December 07, 2023
Out of the ashes springs new life.
October’s vicious selloff that many thought would never end, has come and gone.
The latest crowd-stunning rally has new leadership. There are 3 beaten down sectors to own in 2024.
Did you know that 80% of forest fires are caused by humans? The good news is they eventually end, sprouting new life from the ashes of the forest floor.
Here’s an even better stat. Do you realize that 100% of stock market fires are caused by humans?
It’s true. And the bright side is that once these unsettling periods pass, new life emerges.
Deeply oversold conditions often ignite ferocious rallies. We’ve seen it countless times in the past. The most recent thrust is no different.
However, the sector leadership has a new look and feel. And I believe these once left-for-dead areas of the market are setting up for more gains in 2024.
Today, we’ll size up the macro shift causing the latest face-melter, we’ll zero-in on asset class is benefiting most, and focus our attention on the 3 areas leading the charge.
A Rush of Money is Surging into Small-Caps
The month of November was one for the history books. The S&P 500 surged 8.9%. But as usual, that’s only half the story.
What’s happening under the surface is more telling. There’s a monster rotation that’s been in effect for weeks.
Money is reallocating towards rate-sensitive small-cap stocks.
If you recall, back on October 26th, I made the ultra non-consensus call to buy small-caps. That data-driven case was backed by an oversold BMI, a Russell 2000 Index matching November 2020 levels, and super cheap valuations.
As they say, timing is everything. A major macro event occurred on October 19th just days before that post: Yields topped.
Note how the 10-Year yield peaked at 4.99% on October 19th and dropped to 4.11% on December 6th:
This 88bps plunge in rates is a macro earthquake, jolting other asset classes, namely equities.
Small-cap stocks, handcuffed by manmade rate hikes earlier in the year, have blossomed as yields melt away.
Since the October 19th peak in yields, the S&P Small Cap 600 has surged 8.7%, easily outpacing the large-cap heavy S&P 500’s gain of 6.6%.
Even more impressive, on a 1-week basis small-caps are up 2.8%, while large-caps have traded flat:
That’s what you call mighty outperformance. And when you dive deeper, 3 areas are booming in this lower-rate regime.
3 Beaten Down Sectors to Own in 2024
When you review the small-cap sector performances since October 19th, three oversold groups emerge on top.
Each of these areas have been battered by rampant rate hikes. It’s only fitting that they would bounce hard when the rate noose was loosened.
As of 10/19 these small-cap sectors are surging:
- Discretionary stocks are up +15.37%
- Financial companies have gained +12.64%
- Real Estate equities have surged +12.61%
This explosive rally comes alongside one of the lowest Big Money Index (BMI) readings in recent memory. To recap, we showcased over a month ago, how readings below 19 have been the ultimate bear-killer signal.
In late October and early November, we had 6 days of sub-19 data points. It’s never a good idea to zip the bear-suit too tight when the BMI is deeply oversold.
Below reveals the 1-month returns post that signal from 10/25 – 11/1.
A month later the S&P 500 averaged a +9.4% ripper, right in line with the +11.4% average:
As of 2016, this bear-killer signal has a perfect track record.
This time, the ashes are nurturing the latest seeds of the new bull market: Discretionary, Financial, and Real Estate stocks.
With the Fed set to cut the Fed Funds rate multiple times in 2024, each of these areas are set to thrive in 2024.
- Discretionary names benefiting from lower rates include home-levered sectors, retail, dining and more.
- Financial areas benefiting from lower yields included regional banks, mortgage underwriters, payments & more.
- Real Estate, possibly the most levered to the lower-rate regime, areas crusading higher include hospitality, constuction, & more.
The renaissance is now.
Let’s wrap up.
Here’s the bottom line: Stock market fires are manmade and ultimately end. The latest interest rate plunge has sent the most beaten down sectors surging: Discretionary, Financials, & Real Estate.
As consumers and businesses experience rate relief, these are the target-rich areas where wining stocks are rerating.
There are plenty of small-cap stocks under massive institutional accumulation.
Author: Lucas Downey