Stock Sectors Are Risky Bets, Rising and Falling Frequently

Chasing one year’s hot market sectors often means losing money in the next year.

That’s an old lesson in investing, and it has been borne out once again.

Stock sectors that were big losers in 2020 soared in 2021 to become the year’s biggest winners, while the highfliers of the previous year posted returns that ranged from mediocre to awful.

There are 11 sectors in the benchmark S&P 500 stock index: information technology, health care, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate and materials.

They rise and fall with disturbing regularity.

The big winner in 2020 was the consumer discretionary sector, with companies like Amazon.com, Tesla, Home Depot and Nike. It returned 58 percent, including dividends, that year but only 19 percent in 2021, the third-worst of all sectors. That was well behind the nearly 29 percent return, including dividends, posted by the overall S&P 500 index. The biggest loser for 2020 was energy, with a decline of 35 percent. But it provided investors with a whopping 53 percent gain for 2021.

“Over history, there’s tremendous rotation between the best- and worst-performing sectors,” said Scott Helfstein, executive director of thematic investing at ProShares. “Trying to pick a single sector to outperform the market is like trying to hit a piñata with a broadsword after you’ve been blindfolded and spun around.”

Despite that, analysts continue to predict winning sectors for the year ahead. In December, Bank of America forecast that energy and financial stocks would outperform the market in 2022. That would require both sectors to repeat their impressive results from 2021, when energy was No. 1 and financials were third, with a 36 percent return. Bank of America and Charles Schwab both said they expected health care stocks to outperform the overall S&P 500 in 2022, after virtually matching it in 2021.

It’s easy to bet on sectors using exchange-traded funds, which mirror their performance quite closely. Some representative funds include State Street’s Energy Select Sector SPDR Fund, Vanguard Financials E.T.F. and the iShares US Real Estate E.T.F., which returned 38.7 percent.

The question for individual investors isn’t whether analyst predictions are going to be right or wrong, but whether they should consider sector investing at all.

In an economy recovering from a serious downturn or a recession, for example, one might bet that interest-rate sensitive companies such as those in the consumer discretionary sector will outperform the market, along with financial and real-estate stocks.

That trend held true after the coronavirus pandemic sent stocks plummeting in early 2020. During the three next quarters, consumer discretionary stocks led the way, showing the best performance for the year before heading down in 2021, while the real estate and financial industries followed, recovering from their respective 2020 downturns to top the market…