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Reuters writes that traders piled into traditionally defensive stocks in the last weeks of 2021, spurring a rally some believe may lose steam early in 2022.
The S&P500's top performing sectors in December 2021 were:
Each of those SPDR sectors, which are viewed as popular destinations during times of uncertainty, rose by +9% or more in December and outpaced the broader index's gain of about +5%.
In contrast, the S&P500's Energy (XLE - Free Report) and Info Tech (XLK - Free Report) sectors, among the year's best performers, were up +2.9% and +3.3% for December.
The broader S&P500 index was up +27% in 2021 — its third straight year of double-digit gains.
According to Reuters, this is what traders and investor should look out for, in the global week ahead:
(1) Plenty of ‘Macro’ Reasons to Turn Defensive
Uncertainty over the new Omicron variant, soaring consumer price inflation and a hawkish shift at the Fed bolstered the case for caution.
- Net inflows into the Consumer Staples Select Sector SPDR Fund (XLP - Free Report) 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 (XLV - Free Report) drew net inflows of $963 million this month after pulling $1.1 billion in November, which was its best month since July.
(2) Some Market Participants Believe Rallies in Defensive Shares a Short-Term Phenomenon
They expect an unwinding in early 2022 as investors return to the big tech 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 info tech sectors up +48% and +33% 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.
- Info tech, 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 info tech 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," said Sam Stovall, chief investment strategist at CFRA.
(3) A Threat for Defensive Stocks Could Come from Higher Treasury Yields
These 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 Dec. 31st, 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&P500, where valuations stand at their highest levels in around two decades.
On Dec. 20th, 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&P500'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.
Top Zacks #1 Rank (STRONG BUY) Stocks
Exciting trading stocks are being found in lots of niches now.
(1) Autozone (AZO - Free Report) : The auto parts industry is still booming. Shares here price at $2,096 each (not a typo). The market cap is $43.2B.
I see a Zacks Value score of C, a Zacks Growth score of A and a Zacks Momentum score of B.
(2) Nutrien (NTR - Free Report) : Fertilizer sales are booming, too. Share here price at $75 each and the market cap is $42.7B.
I see a Zacks Value score of D, a Zacks Growth score of F and a Zacks Momentum score of A.
(3) ON Semi (ON - Free Report) : However, the stalwart info tech sector of chips is also booming. This stock trades at $68 and the market cap is $29.3B.
I see a Zacks Value score of D, a Zacks Growth score of B and a Zacks Momentum score of D.
Key Global Macro
Don’t neglect to realize this: This is a U.S. nonfarm payroll report week, giving us a final report for 2021. That key data lands on Friday morning at 8:30 pm EST.
The schedule also shows a slew of PMIs coming out, including the key ISM ones.
On Monday, the Eurozone Markit manufacturing PMI came in at 58 in December, as expected, after the same showing in November. Spain came in as expected at 56.2. Italy reached 62.0, a slight uptick from expectations. Germany was revised lower to 57.4.
The U.S. Markit manufacturing PMI for December came out, too: 57.7 was virtually in-line with the 57.8 expected for November.
On Tuesday, the mainland China Caixin manufacturing PMI (the smaller company one) should be 50.5 in December, after a 49.9 in November.
There is an OPEC meeting.
ISM manufacturing PMI comes out for December. I see a 60.2 is the call, after 61.1 in November.
U.S. JOLTS data should show 11M job openings now.
On Wednesday, the Eurozone Markit services PMI should be 53.3 in December, after a 53.3 in November. Still not as strong as the manufacturing PMI!
ADP private payrolls in the USA should be up +438K in December after 534K in November.
On Thursday, U.S. continuing jobless claims should stay near the multi-decade low of 198K.
ISM services for December should be 67, after a 69.1 in November. That is higher than the expected U.S. ISM manufacturing PMI, which is not the story in Europe, if you recall.
On Friday, the Eurozone CPI in y/y terms should be +4.7% in December.
U.S. nonfarm payrolls should rise by +400K in December, after showing a +210K print in November.
The U.S. household unemployment rate should decline to 4.1% in December, after a 4.2% in November.
U.S. average hourly earnings for December should be up +4.1% y/y. That remains below the CPI rate we are generating at the moment.
Conclusion
Put me in this camp: Growth and tech stocks regain their buyable form in January 2022.
They should keep us interested across all of 2022, for that matter.
I just can’t see this momentum-driven trading market giving up on those more fun and interesting names. Particularly when I incorporate this set of facts: many forward 12-month P/E valuations on major chip stocks are not scary.
There is also a curious top-down strategist consensus. The 1st half of 2022 is supposed to be looking different than the 2nd half.
Since when did the middle of a year matter so much?
Warm Regards,
John Blank
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Defensive or Growth Stocks? Global Week Ahead
Reuters writes that traders piled into traditionally defensive stocks in the last weeks of 2021, spurring a rally some believe may lose steam early in 2022.
The S&P500's top performing sectors in December 2021 were:
Each of those SPDR sectors, which are viewed as popular destinations during times of uncertainty, rose by +9% or more in December and outpaced the broader index's gain of about +5%.
In contrast, the S&P500's Energy (XLE - Free Report) and Info Tech (XLK - Free Report) sectors, among the year's best performers, were up +2.9% and +3.3% for December.
The broader S&P500 index was up +27% in 2021 — its third straight year of double-digit gains.
According to Reuters, this is what traders and investor should look out for, in the global week ahead:
(1) Plenty of ‘Macro’ Reasons to Turn Defensive
Uncertainty over the new Omicron variant, soaring consumer price inflation and a hawkish shift at the Fed bolstered the case for caution.
(2) Some Market Participants Believe Rallies in Defensive Shares a Short-Term Phenomenon
They expect an unwinding in early 2022 as investors return to the big tech 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 info tech sectors up +48% and +33% for the year, respectively. Those gains dwarf the year-to-date performance of utilities, REITs, healthcare and consumer staples.
Since 1990, the info tech 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," said Sam Stovall, chief investment strategist at CFRA.
(3) A Threat for Defensive Stocks Could Come from Higher Treasury Yields
These 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 Dec. 31st, 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&P500, where valuations stand at their highest levels in around two decades.
On Dec. 20th, 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&P500'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.
Top Zacks #1 Rank (STRONG BUY) Stocks
Exciting trading stocks are being found in lots of niches now.
(1) Autozone (AZO - Free Report) : The auto parts industry is still booming. Shares here price at $2,096 each (not a typo). The market cap is $43.2B.
I see a Zacks Value score of C, a Zacks Growth score of A and a Zacks Momentum score of B.
(2) Nutrien (NTR - Free Report) : Fertilizer sales are booming, too. Share here price at $75 each and the market cap is $42.7B.
I see a Zacks Value score of D, a Zacks Growth score of F and a Zacks Momentum score of A.
(3) ON Semi (ON - Free Report) : However, the stalwart info tech sector of chips is also booming. This stock trades at $68 and the market cap is $29.3B.
I see a Zacks Value score of D, a Zacks Growth score of B and a Zacks Momentum score of D.
Key Global Macro
Don’t neglect to realize this: This is a U.S. nonfarm payroll report week, giving us a final report for 2021. That key data lands on Friday morning at 8:30 pm EST.
The schedule also shows a slew of PMIs coming out, including the key ISM ones.
On Monday, the Eurozone Markit manufacturing PMI came in at 58 in December, as expected, after the same showing in November. Spain came in as expected at 56.2. Italy reached 62.0, a slight uptick from expectations. Germany was revised lower to 57.4.
The U.S. Markit manufacturing PMI for December came out, too: 57.7 was virtually in-line with the 57.8 expected for November.
On Tuesday, the mainland China Caixin manufacturing PMI (the smaller company one) should be 50.5 in December, after a 49.9 in November.
There is an OPEC meeting.
ISM manufacturing PMI comes out for December. I see a 60.2 is the call, after 61.1 in November.
U.S. JOLTS data should show 11M job openings now.
On Wednesday, the Eurozone Markit services PMI should be 53.3 in December, after a 53.3 in November. Still not as strong as the manufacturing PMI!
ADP private payrolls in the USA should be up +438K in December after 534K in November.
On Thursday, U.S. continuing jobless claims should stay near the multi-decade low of 198K.
ISM services for December should be 67, after a 69.1 in November. That is higher than the expected U.S. ISM manufacturing PMI, which is not the story in Europe, if you recall.
On Friday, the Eurozone CPI in y/y terms should be +4.7% in December.
U.S. nonfarm payrolls should rise by +400K in December, after showing a +210K print in November.
The U.S. household unemployment rate should decline to 4.1% in December, after a 4.2% in November.
U.S. average hourly earnings for December should be up +4.1% y/y. That remains below the CPI rate we are generating at the moment.
Conclusion
Put me in this camp: Growth and tech stocks regain their buyable form in January 2022.
They should keep us interested across all of 2022, for that matter.
I just can’t see this momentum-driven trading market giving up on those more fun and interesting names. Particularly when I incorporate this set of facts: many forward 12-month P/E valuations on major chip stocks are not scary.
There is also a curious top-down strategist consensus. The 1st half of 2022 is supposed to be looking different than the 2nd half.
Since when did the middle of a year matter so much?
Warm Regards,
John Blank