The final trading day of 2022 marks what a year it has been. The right word to use is painful. The S&P is on the cusp of a rare 20% annual decline. This would be the fourth worst year for stocks (S&P500) since 1945, behind only 2008 (-38.5%), 1974 (-29.7%) and 2002 (-23.4%).

Now, the good news: the market tends to bounce back in the year after. “Should history repeat (and there’s no guarantee it will), the S&P 500 has a good chance of posting an above-average return in 2023,” Sam Stovall, chief investment strategist at CFRA Research, said in a note to clients. 

Here's some statistics: the S&P has had 21 down years in the 77 years since 1945 (27% of the time), but the year after has been up 81% of the time, with an average gain of 14.2%, according to Stovall. That beats a typical year, when the S&P rises 70% of the time and posts an average gain of 8.6%. 

What should investors buy after a losing year? 

Should investors buy last year’s winners or last year’s losers? Stovall says the historic winning strategy is different following down years. 

“Following up years, history says that investors should stick with the four best-performing sectors, and ‘let your winners ride’ into the new year,” Stovall said. “However, if the market had fallen, history recommends rotating from ‘first to worst’ by getting out of those likely defensive groups that held up best during the decline and rotate into those sectors that fell the furthest.” 

This suggests investors would want to rotate out of the best performing sectors of 2022: energy (+57%), utilities (flat), consumer staples (-3%), healthcare (-3%). The worst performing sectors in 2022 were: communication services (-40%), consumer discretionary (-37%), real estate (-28%), technology (-28%).

Sector rotation: what happens after a down year?

However, for inexperienced investors, we think it's not worth it to fumble around. Historically, the four worst-performing sectors are up on average 14.8% the following year. The number is 11.6% for the four best-performing sectors. 

Is the 3.2% worth messing around with your portfolio if you are inexperienced? We believe as long as you hold quality names with high profits, those profits trade at a reasonable valuation, and those profits are seen to be resilient into a potential recession, you can hold into and throughout 2023.