Sector Review: The Leaders and Laggards of 2020
The books are officially closed on 2020, a year in which the COVID-19 pandemic generated tremendous volatility across many sectors. The S&P 500 returned 16.3% for the year, and 11.7% in just the fourth quarter. Note that all returns discussed here are total returns, which include the effect of dividends paid during the year.
The energy sector began to get battered in February following a price war between Saudi Arabia and Russia. The overall stock market plunged from February to March, as COVID-19 gained a foothold in the U.S. Every sector swooned during this time frame, with a decline of more than 30% in both the S&P 500 and the Dow Jones Industrial Average.
Following the lows of late March, all 11 S&P 500 sectors recovered. Some bounced back much stronger than others. The S&P 500 and the Dow hit record highs in the final trading week of 2020.
Income-oriented sectors mostly underperformed for the year, while technology was on top for the second straight year. The tech-heavy NASDAQ Composite gained a whopping 43.6% in 2020.
Let’s dissect the 2020 performance, sector-by-sector, with an eye toward what you can expect in 2021.
11 Sector Review
Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.
For the second year in a row, Technology was the biggest winner of the year with a gain of 43.6%. This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).
The Consumer Discretionary sector has now had three strong years in a row, returning 29.6% in 2020. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).
Communication Services also topped 25%, gaining 26.9% for the year. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media & services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).
The Materials sector was the final sector to outperform the S&P 500 for the year with a return of 20.5%. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).
The Health Care sector got hit hard this year as profitable elective surgeries declined during the pandemic. But those surgeries started to pick up later in the year. This sector returned 13.3% for the year. The Health Care sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).
The Industrials sector followed up a strong 2019 with another double-digit gain in 2020, returning 10.9%. Component industries include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, and machinery. Important constituents of this sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).
The Consumer Staples sector was the final sector to return double-digits in 2020 with a return of 10.1%. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).
Next we have a steep drop to the Utilities sector, which eked out a 0.5% return for the year as the pandemic disrupted utility consumption patterns. This sector was also uncharacteristically more volatile than the S&P 500 in 2020. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).
The Financials sector never recovered back into positive territory after the March economic meltdown. It closed the year with a total return of -1.7%. However, it began to show signs of life in Q4, when it was the second best performer with a quarterly return of 23.1%. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan (NYSE: JPM), and Citigroup (NYSE: C).
The Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), got hit especially hard by the pandemic as tenants struggled to pay rents in 2020. The sector closed the year down 2.2% on the year, and remained the weakest sector in Q4. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.
In 2020 the Energy sector endured the triple-whammy of a price war, the pandemic, and perceptions that fossil fuels are about to relinquish their dominance to renewable energy and electric vehicles. Those factors combined to send the energy sector reeling in 2020 as it closed the year down 32.7%. It would have been much worse if the sector hadn’t rebounded in Q4 with a sector-leading return of 28.2%. Some of the energy sector’s biggest holdings are ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB).
Positioning for 2021
Lately the talking heads have spent a lot of time talking about a recovery in the energy sector in 2021, along with a bounce in the other income-generating sectors. However, keep in mind that the energy sector already had a significant bounce in Q4, and where it goes from here depends strongly on how quickly we emerge from the pandemic and see economic activity normalize. I am betting that’s not until the second half of the year.
Likewise for the real estate sector. There remains a lot of pandemic-risk within this sector. Less risky in my view are the utility and consumer staples sectors, which should provide decent returns at modest risk.
After two straight years of strong returns, the technology sector could be ripe for a pullback in 2021, especially if inflation becomes a factor at any point in the year.
Editor’s Note: Our colleague Robert Rapier is the in-house energy expert at Investing Daily. He just predicted that the energy sector will bounce back, probably in the second half of 2021.
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