NEW YORK: Investors have piled into traditionally defensive stocks in the last weeks of 2021, spurring a rally some believe may lose steam early in 2022.

       The S&P 500’s top performing sectors last month were consumer staples, real estate investment trusts (REITs), healthcare and utilities.

       Each of the sectors, which are viewed as popular destinations during times of uncertainty, had risen by 9% or more in December and outpaced the broader index’s gain of about 5%.

       In contrast, the S&P 500’s energy and information technology sectors, among 2021’s best performers, were up 2.9% and 3.3% for December.

       The broader index was up 27% in 2021 and on track for its third straight year of double-digit gains.

       Investors have had plenty of reasons to turn defensive in recent weeks, as uncertainty over the new Omicron variant, soaring inflation and a hawkish shift at the Federal Reserve bolstered the case for caution.

       Net inflows into the Consumer Staples Select Sector SPDR Fund stood at US$697mil (RM2.91bil) in December, putting it on track for its strongest month since July, according to Refinitiv Lipper data.

       The Health Care Select Sector SPDR Fund drew net inflows of US$963mil (RM3.99bil) last month after pulling US$1.1bil (RM4.58bil) in November, which was its best month since July.

       Some market participants, however, believe the rallies in defensive shares are likely a short-term phenomenon and expect an unwinding in early 2022, as investors return to the big technology 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 this month.”

       That theory made sense in 2021, with the S&P’s energy and information technology sectors up 48% and 33% for the year, respectively.

       Those gains dwarfed 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.

       Information technology, 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 information technology 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.

       A threat to the recent rally in defensive stocks could also come from higher Treasury yields. — Reuters