December Trends Continue

Although the broader equity indices began the year with some weakness, value continued its outperformance from December. The top chart highlights December and YTD absolute returns for equities, commodities, and bonds. The lower chart focuses on equity sector and style returns relative to the S&P 500.

Higher interest rates have created a headwind for equities. Both the AGG (US Aggregate Bond ETF) and the HYG (HY Corp Bond ETF) had negative returns. Growth and the NASDAQ-100 were the big losers through Monday 1/10. However, value had positive returns as did oil and soybeans.

Value stocks outperformed in December and YTD but the sectors that drove returns shifted. In the lower chart, anything to the right of the line outperformed in December while above the horizontal line indicates outperformance YTD. Industrials and Staples are in the upper right quadrant, outperforming in both periods. Energy and Financials are the big winners, so far, in 2022. Not only did they beat the S&P 500 but they had positive absolute returns too.

Fed tightening could increase rates and steepen the yield curve, providing better margins for banks. Higher rates also, theoretically, hurt growth stocks more as future cash flows are now discounted at higher rates, shrinking their values. The economic recovery and constrained crude oil supply has supported crude prices and the energy sector.

More to ponder as we transition from a loose monetary policy environment to one that is tighter, or at least less loose.