Investors have piled into traditionally defensive stocks in the last weeks of the year, spurring a rally some believe may lose steam early in 2022.
The S&P 500’s top performing sectors this month are consumer staples, real estate investment trusts, healthcare and utilities. Each of the sectors, which are viewed as popular destinations during times of uncertainty, have risen by 9% or more in December and outpaced the broader index’s gain of about 5%.
By contrast, the S&P 500’s energy and information technology sectors, among the year’s best performers, are up 2.7% and 3.8% for December. The broader index is up 27% in 2021 and on track for its third straight year of double-digit gains.
Investors have had plenty of reasons to turn defensive in recent weeks, as uncertainty over the new Omicron variant, soaring inflation and a hawkish shift at the Federal Reserve bolstered 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 Refinitiv Lipper data. The Health Care Select Sector SPDR Fund drew net inflows of $963 million this month after pulling $1.1 billion in November, which was its best month since July.
Some market participants, however, believe the rallies in defensive shares are likely a short-term phenomenon and expect an unwinding in early 2022 as investors return to the big technology and growth stocks that have led markets higher for years.
Zachary Hill, head of portfolio management at Horizon Investments, believes some of the strength in defensive stocks may reflect fund managers taking profits on winning positions and reallocating funds toward beaten down names, a common year-end practice for many investors.
“It’s not terribly surprising after a really good year for stocks to see some of the laggard sectors … do a little bit better,” Hill said. “That’s something that could potentially reverse in January.”
That theory makes sense this year, with the S&P’s energy and information technology sectors up 47% and 34% for the year, respectively. Those gains dwarf the year-to-date performance of utilities, REITs, healthcare and consumer staples.
On a historical basis, utilities have been the top performing S&P sector in December, logging an average gain of 1.9% for the month since 1990, only to fall 0.25% on average in January, according to a CFRA Research analysis.
Information technology, meanwhile, has been the worst performer in December with an average gain of 0.67%, but has logged an average gain of 2.83% in January, the data showed.
Since 1990, the information technology sector has risen about 4,650%, while the utilities sector is up about 250%.
“People are much more willing to embrace risk in the new months than they are in the final months of the year,” Sam Stovall, chief investment strategist at CFRA, said.
A threat to the recent rally in defensive stocks could also come from higher Treasury yields, which may accompany a more hawkish Fed and dim the allure of utilities and other sectors that draw investors with their comparatively high dividends, said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
An early December Reuters survey of over 60 fixed-income experts showed the yield on the benchmark U.S. 10-year note rising to 2.08% in the next 12 months. On Friday, the yield on the 10-year note was at 1.50%. The Fed has signaled a faster tapering of its asset purchases and three rate hikes for 2022.
Others, however, say a more aggressive Fed could also weigh on the broader S&P 500, where valuations stand at their highest level in around two decades.
On Dec. 20, analysts at Morgan Stanley said they favored defensive stocks over cyclicals, as the Fed begins paring back monetary accommodation from markets.
“Growth stocks would be more vulnerable to that tapering than defensive ones given their much higher valuations,” the bank’s analysts wrote.
Hill, of Horizon Investments, believes stocks are likely to be more volatile next year after a relatively placid 2021. The S&P 500’s one-month volatility averaged 12.5 for the year, the lowest since 2017, according to Refinitiv data.
“It won’t be nearly as straight a line as we had this year but we still think the outlook for stocks is broadly positive,” he said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Howard Goller)
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
