In a year when soaring inflation and sinking growth rocked corporate boardrooms and Wall Street trading floors, some nooks of the stock market gave investors shelter to hide out.
What worked in most of 2022 essentially was a long-inflation trade: A bet that the dollar and Treasury yields would rise on the Federal Reserve’s most aggressive policy tightening in four decades, while the biggest winners of a low-rate environment — tech companies — would fall.
Below are the corners of the stock market that did best in 2022. In some cases, the gains came as a welcome respite after years of meager returns that frustrated investors, while in others the best hope was to simply lose less money than the broader market.
Re-Energized
Energy stocks are on a tear in 2022 as every other S&P 500 sector is nursing losses. The S&P 500 Energy Index returned 63% including dividends, outperforming the broader benchmark for a second straight year. This is a reversal of recent trends, however, considering that in the 10 years through 2020 the group fell at a 2.7% annual pace versus a 14% annual return for the S&P 500.
A combination of factors has worked in the group’s favor. First, Russia’s invasion of Ukraine tightened supply and sent energy markets into spasms. Then, China’s move to abandon its Covid Zero policy and revive consumption further propelled the rebound. And yet the shares are still relatively cheap, with energy stocks in the S&P 500 selling for 9.4 times estimated earnings, less than every other group in the benchmark.
“Energy stocks may continue to go up over the winter heating season,” said Kim Forrest, founder and chief investment officer at Bokeh Capital Partners. “Longer-term, supply continues to be limited and demand is going up, which will likely continue to work in favor of energy firms as a whole.”
Analysts covering energy companies in the S&P 500 say the rally isn’t over year. Buy recommendations for the group make up 61% of analysts’ projections, compared with 55% for the broad equities benchmark, data compiled by Bloomberg show.
Still, JPMorgan & Chase & Co.’s chief global markets strategist Marko Kolanovic recently warned that the rally in oil and gas stocks is due for a pause. And the shares have already come off their highs on mounting concerns that a recession is in the offing next year, which would curb consumption.
Dow a Dog No More
In most years, a 8.2% drop for the Dow Jones Industrial Average would cause little celebration. But not in 2022. The 30-member gauge has outperformed the 503-member S&P 500 by 10 percentage points this year, the widest performance spread since 1933, data compiled by Bloomberg show.
The 126-year-old index is big on established industrial firms like Boeing Co. and Caterpillar Inc. and has relatively limited exposure to tech giants. That was a winning combination this year, when rising interest rates took the shine out of tech high-flyers by making the present value of future profits less appealing. A pair-trade strategy of shorting an exchange-traded fund that tracks the Nasdaq 100 Index — known by its QQQ stock symbol —- while buying the Dow would have yielded as much as 35% this year, excluding various costs.
“When people look at what they want to own in a rising rate environment, it’s usually the relatively boring stocks that offer stability and dividends,” said Brent Kochuba, founder of analytic service SpotGamma. “It’s been a year of extreme sector rotations, and the Dow versus the QQQ bet has been a successful trade.”
Bringing Value
Value stocks — those that sell for a low multiple of earnings, sales or corporate net worth — were another area of the market that held up relatively well. While higher interest rates put pressure on expensive technology and consumer discretionary shares, they took a much smaller bite out of cheaper stocks, which tend to offer more near-term cash flows.
While the S&P 500 Value Index is down 5.1% on a total return basis in 2022, it’s still on track for its best year since 2000 relative to its growth counterpart. So, a trade of buying value stocks and shorting growth stocks soared 23% in 2022.
However, the strategy is poised for a breather, according to Morgan Stanley chief US equity strategist Michael Wilson. At this point in the cycle, value shares in the industrial, financial and energy sectors are becoming as vulnerable to an economic slowdown as are high-multiple technology stocks, Wilson said in a Bloomberg TV interview this month.
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