Please ensure Javascript is enabled for purposes of website accessibility

2 Shocking Sectors That Defied the Stock Market's January Plunge

By Dan Caplinger – Feb 1, 2014 at 11:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Most people wouldn't have picked these stocks to do well in 2014, but they did. Find out what they are.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The S&P 500 (^GSPC -0.16%) lost about 3.6% in January, with broad-based declines in the majority of stocks in the index. Out of the major sectors in the S&P, only two managed to post gains. Yet even more surprising than the fact that two sectors overcame such heavy headwinds to climb was which sectors did well. As it turned out, the winning sector in the first month of 2014 was the utility sector, as SPDR S&P Utilities (XLU -0.74%) ended January with a 3% gain. Health-care came in a distant No. 2, as SPDR Select Health-Care (XLV -0.25%) gained just under 1%.

The big bond surprise
For utilities, the explanation for the sector's strong performance is obvious: interest rates defied expectations by falling substantially. Coming into 2014, most analysts expected 2013's big jump in rates to continue, with the Federal Reserve having signaled its intent to reduce its artificial influence on long-term interest rates by cutting back on its bond-buying activity. Yet even as the taper took hold, the poor performance in stocks left investors little choice but to retreat to bonds.

Traditionally, utility stocks have traded in a highly correlated way to bonds. Utilities tend not to be high-growth businesses, relying largely on established customers and benefiting from solid but unimpressive profit margins that in many cases are subject to regulatory oversight. Typically paying high dividends, utility stocks resemble bonds in their lack of growth prospects yet dependable income, and so they often trade that way. So as bonds gained in price in January, so too did utilities, with Exelon's (EXC -0.57%) nearly 6% gain being at the upper end but still representative of the industry as a whole.

Getting healthy
Health-care stocks' strong performance is a bit more surprising, but to understand, it's helpful to look at which health-care stocks did well. Health-insurance providers did not fare well, as lingering concerns about the Affordable Care Act continue to weigh on the industry.

But several areas in health care showed strength. On one hand, large pharma stocks like Merck did well for many of the same reasons as utility stocks: their high dividends and growth challenges made investors treat them like bond alternatives, and strength in bonds led to strength in those stocks. At the same time, though, higher-growth biotech and development-stage pharma stocks also had strong performance, with 2013 outperformer Gilead Sciences (GILD 0.65%) climbing another 7% in January on the back of treatments like its high-priced hepatitis-C drug Sovaldi. With upward support from those subsectors, health-care stocks could continue to see gains in the future.

What's next?
It's impossible to tell whether January's stock market trends will last throughout 2014, and for both utilities and more-mature stocks in the health-care sector, trends in the bond market will play a huge role in their overall performance this year. Yet the most important lesson you can learn from these sectors is that even when the market at large is down, you can always find some lucrative opportunity in which you can invest profitably.

Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Exelon and Gilead Sciences. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,957.63 (-0.16%) $-6.31
Gilead Sciences Stock Quote
Gilead Sciences
GILD
$85.76 (0.65%) $0.55
Exelon Stock Quote
Exelon
EXC
$40.00 (-0.57%) $0.23
Health Care SPDR Stock Quote
Health Care SPDR
XLV
$135.78 (-0.25%) $0.34
Utilities SPDR Stock Quote
Utilities SPDR
XLU
$69.69 (-0.74%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.