It is that time of the month when I explore what sectors have typically shined in the upcoming month, and when I come across sectors that have not historically done well in the upcoming month. After researching the average mutual fund performance data for the eleven sectors that comprise our economy between 1987 and 2011, it is clear that Natural Resources have significantly outperformed the rest of the market.
Consider the following returns:
Natural Resources | S&P 500 | Health Care | Utilities | |
1987 | 3.50% | 3.95% | 11.97% | -3.04% |
1988 | 3.67% | 2.53% | 2.45% | -1.57% |
1989 | -1.21% | -2.49% | -0.66% | -1.41% |
1990 | 1.13% | 1.29% | 0.52% | 0.50% |
1991 | 8.86% | 7.15% | 9.67% | 4.04% |
1992 | 0.71% | 1.30% | -3.01% | -0.29% |
1993 | 9.36% | 1.36% | -11.72% | 4.56% |
1994 | -2.37% | -2.71% | -2.86% | -3.99% |
1995 | 3.74% | 3.90% | 2.59% | 0.80% |
1996 | 2.05% | 1.60% | 2.34% | -0.78% |
1997 | -2.50% | 0.78% | -0.12% | 0.23% |
1998 | 2.86% | 7.21% | 5.39% | 3.45% |
1999 | -3.27% | -3.11% | -4.39% | -3.00% |
2000 | -2.14% | -3.21% | 17.56% | -1.49% |
2001 | 0.73% | -9.12% | -3.40% | -2.08% |
2002 | 4.98% | -1.93% | -2.97% | -2.27% |
2003 | 2.68% | -1.50% | -2.40% | -3.30% |
2004 | 5.76% | 1.39% | 1.66% | 1.98% |
2005 | 11.66% | 2.10% | -0.78% | 2.52% |
2006 | -8.58% | 0.27% | 1.48% | 0.49% |
2007 | 1.10% | -1.96% | -1.88% | 2.40% |
2008 | 11.13% | -0.56% | -0.89% | -0.12% |
2009 | -7.76% | -10.6% | -11.06% | -10.54% |
2010 | 2.94% | 3.10% | 1.25% | -0.06% |
2011 | 4.50% | 3.43% | 2.71% | 2.38% |
Over the last twenty-five February's the average natural resources mutual fund has finished in positive territory eighteen times. That means that 72% of the time, over the last twenty-five years natural resource mutual funds, on average, have made money in the month of February. Over that same period of time the S&P 500 index posted positive returns in fifteen of the last twenty-five February's, or 60% of the time. The results may seem highly correlated but when you look at the total return provided for the month of February in the time period examined you will see much more bang for your buck with natural resources. For example, the average annual compounded return for natural resources funds for the time period examined (approximately 700 days) equated to 29.76%. The average annual compounded return for the S&P 500 during the month of February from 1987 to 2011 was only 1.07%.
My research also found two particularly weak sectors for the month of February. Those sectors were utilities and health care mutual funds. The average performance for these two sector funds showed that utility funds have only posted gains in the month of February eleven times over the last twenty-five years (44% of the time), and that the average health care fund has posted positive returns twelve times (48% of the time). What is interesting about this data is that it is flipped from the data researched for the month of January. If you remember an earlier post of mine it showed that health care funds were traditionally the strongest performing sector in the month of January, while energy funds (many energy stocks are found in a natural resource fund) were the weakest sector. I am already starting to see a rotation. As we near the end of January, CNBC reported yesterday a noticeable infusion of capital into energy stocks. Perhaps money managers have noticed the same trend that my research yielded.
Obviously we do not know what the month of February will produce, but based on the past twenty-years of data coupled with the need for a possible hedge against Iranian threats to close down oil shipping lanes, we could see a rather robust February once again for natural resources and energy equity investments. A further boost could be seen if winter-like conditions normalize in the northeast, as opposed to the rather mild winter we have been experiencing.
You can position yourself in a couple different ways for the month of February. The SPDR S&P Global Natural Resources ETF (GNR) would give you access to natural resources. If you prefer a more energy specific approach then I would suggest the Energy Select SPDR ETF (XLE). You may also want to research mutual funds in these sectors that have outperformed their category average. If you take this approach you need to avoid mutual funds with sales charges because they will eat away at any return that may come in the month of February, and you should also be aware of any surrender charges that may occur if the fund is not held for a specific length of time.
Thank you and good luck everyone!
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
