Op-ed: These 3 market sectors shone even as investors grew weary of hearing about inflation
- Whether it’s consumer price index’s 6.8% surge in November or the sharp gain in hourly wages, inflation is a ubiquitous theme in the markets.
- At the same time, it’s been a strong year for stocks, with the S&P 500 garnering a nearly 25% return for 2021.
- Three categories are shining as the biggest winners: energy/materials, financials and tech.
These days, we are inundated with inflation talk, theories, and fear. From Federal Reserve Chair Jerome Powell to my bike store, we hear commentary galore (is it transitory, lukewarm, or hot?), but what does the market really think?
One significant aspect to the stock market, and an insurance policy for hordes of analysts working on Wall Street, is its generous offering of data, which we can pore over for clues about its biases and drivers. This year is no exception and provides interesting insights into how investors may have felt about inflation all along.
The most significant number I can come up with for 2021 right now is 25%. That's roughly the total return year-to-date for the S&P 500. If anyone thought that the 18% return last year was a forward-looking nod to vaccines vanquishing the pandemic and a return to the good old days, think again. That was just the start of the recovery climb out of the Covid-induced abyss of 2,237.40, where the S&P closed on March 23, 2020, leagues away from its current level just shy of 4,700.
If investors really hated inflation, which clocked at an annual rate of 6.8% in November, the highest level since 1982, they would not have kept the rally going all year. With a 4.9% annual increase in hourly wages, a category nearly impossible to reverse in the near term, the market must have accepted the disappearing prospects of a return to pre-Covid consumer price index growth in 2022.
That acknowledgement does not imply that the market either likes inflation or feels equally comfortable with all equity sectors in a rising price environment. What we have observed in 2021, is the wide dispersion in returns across industry groups. As of Dec. 9, energy (+49%), financials (+32%), and tech (+31%) have been the big winners, while staples (+8.6%) and utilities (+8.9%) have lagged.
Sector Winners and Laggards, as of Dec. 9
|Ticker||Sector||Price||Performance 12/31/20 - 12/9/21|
|SP285||Consumer Discretionary -SEC||1,606.70||23.4|
|SP477||Consumer Staples -SEC||756.1||8.6|
|SP565||Health Care -SEC||1,559.60||17.8|
|SP701||Information Technology -SEC||3,006.60||31.2|
|SP793||Communication Services -SEC||265.8||19.8|
|SP500.404020-CME||Equity Real Estate Investment||301.5||33.1|
Digging deeper, we looked at the 50 top-performing stocks this year among the S&P 500 and the universe of all stocks with market capitalizations over $5 billion. The table below confirms that most of the winners for the year reside in these three basic cohorts: energy/materials, financials and technology.
What does this have to do with inflation? I'm glad you asked. All three sectors may be viewed as inflation beneficiaries or, at the very least, inflation-agnostic plays.
Energy and materials are commodity-based, and demand for their products collapsed with Covid. However, once the promise of vaccines and reopening emerged, oil, gas, and most commodities rebounded from prices that had fallen to a fraction of their pre-pandemic levels.
Financials are often viewed as inflation hedges since interest rates historically climb when inflation heats up. This reflects the eroding effect of higher prices on a currency's value in the future, which is remedied by rate hikes on debt.
Technology is a more nuanced winner in the inflation game, a subtlety not lost on the market. The large tech players and most software companies have tremendous economies of scale. As their revenues scale, their costs, particularly labor, do not grow at nearly the same degree, cushioning profit compression from wage escalation. The market's enthusiasm in 2021 for technology may be an appreciation of the industry's limited vulnerability to inflation.
Oil, gas, commodities, banks, and cloud computing may be unlikely bedfellows, but they all have characteristics that render them either more valuable or less endangered by inflation. As a result, rather than fearing the consequences of higher prices, the market continued to climb to record heights in 2021, led by these wildly diverse but strangely connected sectors.
Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.