fbpx
Reviewing Sector Performance in 2021 and Positioning in 2022

Reviewing Sector Performance in 2021 and Positioning in 2022

A LOOK AT SECTOR PERFORMANCE

Every single U.S. sector, as determined by S&P Dow Jones Indices, posted gains in 2021. You heard that correctly, every single one! Of course, each sector doesn’t move in unison, so let’s explore this a bit further. 

The energy sector was the big winner in 2021, whether it be large-cap, mid-cap, or small-cap companies. They posted 2021 gains of 53.4%, 71.3%, and 60.0%, respectively. Real estate also had a solid 2021, posting gains of 46.2%. 

One thing that we talk a lot about is cyclicality and reversion to the mean. When we are talking about sectors, cyclicality means that sectors generally go in and out of favor. Said another way, a sector that outperforms one year may underperform the following year or vice versa. For example, let’s look at what energy did in 2020 (keep in mind we just talked about it being the big winner in 2021). Returns for large, mid, and small-cap energy stocks were -32.8%, -42.8%, and -40.0% respectively. From 2020 to 2021, energy went from the worst-performing to the best-performing sector. 

Financials is a sector that many are looking at opportunistically in 2022. The reason being is that banks are one of the few places that benefit from rising interest rates. One of the key points to take away is that it’s unlikely that a single sector can consistently be the “winner” year-in and year-out over the long haul.

A Look at Factor Performance

Factors are another variable, like sectors, that move in and out of favor. Most people are familiar with sectors, but might not be able to list as many investment factors off the top of their heads. BlackRock describes factor investing as “an investment approach that involves targeting specific drivers of return across asset classes.” Factor investing is not passive; one tries to find attractive attributes of a security that will enhance returns and/or reduce risk. There are macroeconomic factors and style factors. Similar to the sector discussion above, each of the seventeen factors (among S&P 500 companies) delivered positive returns in 2021. The top performing factor in 2021 was High Beta, at 40.9%. 

One item that many clients have asked about over the last several years is growth versus value. Growth has dominated value in recent memory, including in 2020 when it outperformed value with a 33.5% return vs. 1.4% return. In 2021, S&P 500 growth again outperformed S&P 500 Value, 32.0% to 24.9%. In 2022, we might see growth and value continue to have less of a dispersion compared to the 2010s, where growth significantly outperformed value. Momentum, the worst performing factor in 2021– granted it still produced a 22.8% return – was the third-best performing factor the year prior when it returned 28.3%. Momentum is another good example of a factor that outperformed the general index in one year (2020), only to underperform the index the following year (2021). 

Where to go from here?

Does this mean that you should only own energy? Or only own high beta? Of course not. There is generally a reversion to the mean. Again, most investors need exposure to a diversified portfolio and a disciplined investment process. Rebalancing is one technique to help take small gains over time and not become too concentrated on a single sector or factor. 

Note that diversification doesn’t imply that owning every sector equally-weighted is always the best approach, either. If you own an S&P 500 index fund, you own every sector, but in different weights. If we’re looking at the end of 2021, 29.2% of your S&P 500 exposure would be in information technology alone. Also, keep in mind that true diversification includes more than just sector diversification. Having a mix of uncorrelated assets from a geographic, asset class, and allocation perspective must all be considered when building a diversified portfolio.

Mitch DeWitt, CFP®, MBA

2022 Investment & Market Outlook Guide

Mitch DeWitt’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst™

Through a lens of current and historical data, Walkner Condon’s resident CFA® explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time.