Performance Through Q3 And its Impact on Q4 Performance

Every year, the makeup and number of sectors that outperform the S&P 500 changes. This year, four sectors (Energy, Financials, Real Estate, and Communication Services) outperformed the S&P 500 through the end of Q3, while last year it was only three sectors that outperformed in the first three quarters of the year (Technology, Consumer Discretionary, and Communication Services).

As we all know, past performance does not indicate future performance, and in looking at sectors that have outperformed the S&P 500 in the first three-quarters of prior years compared to how they performed in Q4, the same holds true. The table below lists the number of sectors that outperformed and underperformed the S&P 500 in the first three quarters of each year since 2000 and then shows their median performance during Q4 of the same year. Looking at a summary of the annual results, it’s almost a coinflip as to whether or not the leading sectors in the first three quarters of a given year will continue to outperform in Q4.On average, the sectors that outperform YTD through 9/30 have averaged a Q4 gain of 3.58% (median: +6.40%) with positive returns 76% of the time. Sectors that lag the S&P 500 in the first three-quarters of the year average a rest of year gain of 3.67% (median: 5.95%) with gains 71% of the time. While the term ‘strength begets strength’ has historically been applicable to the broader market, at the individual sector basis, buying the YTD winners (or losers) in expectations for continued momentum to close out the year (or a mean reversion bounce), it hasn’t been much of a winning strategy.