NEW YORK (Reuters) – Investors have crammed into traditionally defensive stocks in the last few weeks of the year, sparking a rally that some say could run out of steam in early 2022.
The best performing sectors in the S&P 500 this month are Consumer Staples, Real Estate Investment Trusts, Health Care and Utilities. Each of the sectors, which are seen as popular destinations in times of uncertainty, rose 9% or more in December and topped the gain of the broader index by about 5%.
In contrast, the S&P 500’s energy and information technology sectors, among the top performers of the year, were up 2.7% and 3.8% for December. The broader index is up 27% in 2021 and on track for its third consecutive year of double-digit gains.
Investors have had plenty of reasons to get on the defensive in recent weeks, as uncertainty over the new Omicron variant, soaring inflation and a hawkish turn by the Federal Reserve have reinforced the case for caution. .
Net inflows into the Consumer Staples Select Sector SPDR Fund stood at $ 697 million in December, putting it on track for its strongest month since July, according to data from Refinitiv Lipper. The Health Care Select Sector SPDR Fund drew net inflows of $ 963 million this month after withdrawing $ 1.1 billion in November, its best month since July.
Some market participants, however, believe defensive stock rallies are likely a near-term phenomenon and expect an unwinding in early 2022, as investors return to the big tech and growth stocks that have driven the markets. on the rise for years.
Zachary Hill, head of portfolio management at Horizon Investments, believes that part of the strength of defensive stocks may reflect fund managers taking profits on winning positions and reallocating funds to beaten names, a common practice in end of the year for many investors.
“It’s hardly surprising after a very good year for stocks to see some of the lagging sectors… doing a little better,” said Hill. “This is something that could potentially be reversed in January.”
This theory makes sense this year, as S & P’s energy and IT sectors grew by 47% and 34% respectively for the year. These gains overshadow the year-to-date performance of utilities, REITs, healthcare and consumer staples.
On a historical basis, utilities was the best performing S&P sector in December, recording an average gain of 1.9% for the month since 1990, falling 0.25% on average in January, according to an analysis by CFRA Research.
Information technology, meanwhile, was the worst performer in December with an average gain of 0.67%, but registered an average gain of 2.83% in January, according to the data.
Since 1990, the information technology sector has grown by approximately 4,650%, while the utilities sector has grown by approximately 250%.
“People are much more willing to take risks in the new months than they are in the later months of the year,” said Sam Stovall, chief investment strategist at CFRA.
A threat to the recent rally in defensive stocks could also come from higher Treasury yields, which could accompany a more hawkish Fed and dampen the appeal of utilities and other sectors that attract investors with their relatively high dividends, a said Rob Haworth, senior investment strategist at US Bank Wealth Management.
A Reuters survey in early December of more than 60 fixed-income experts showed that the yield on the US 10-year benchmark bond stood at 2.08% over the next 12 months. On Friday, the yield on the 10-year note was 1.50%. The Fed announced a faster reduction in asset purchases and three rate hikes for 2022.
Others, however, say that a more aggressive Fed could also weigh on the wider S&P 500, where valuations are at their highest level in about two decades.
On December 20, Morgan Stanley analysts said they favor defensive stocks over cyclicals, as the Fed begins to cut back on monetary market accommodations.
“Growth stocks would be more vulnerable to this decline than defensive stocks given their much higher valuations,” the bank analysts wrote.
Hill of Horizon Investments believes stocks are likely to be more volatile next year after a relatively quiet 2021. The one-month volatility of the S&P 500 averaged 12.5 for the year, the lowest since 2017, according to data from Refinitiv.
“It won’t be as straight a line as the one we’ve had this year, but we still think the outlook for equities is broadly positive,” he said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Howard Goller)
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