Market Correction: Investing in the Best-Performing Sectors can Help Minimize Losses

Summary

• The steep rise of the Treasury note and long-term Treasury bond yields caused a sharp selloff in most equity sectors
• Technology experienced the largest decline, but a short-term oversold rally is likely
• Natural resources and financials continue to gain, despite the market weakness

A combination of faster than expected economic recovery from the pandemic, new fiscal stimulus, and accommodative monetary policy raised inflation expectations that resulted in a rapid increase in yields (Chart 1).

Chart 1.

Higher bond yields also caused a sharp selloff in technology. Chart 2. shows that the technology-focused Nasdaq index is nearing its trend support that increases the likelihood of at least a short-term oversold rally. However, if yields continue to rebound towards the historical levels, the selloff can resume too.

Chart 2.

Natural resources, including energy, is the best performing industry group due to expectations of a quick worldwide economic recovery, limited supply increases, and the weakness in the U.S. dollar. Within this group, the Fidelity Select Energy Services (FSESX) is the best performing sector fund (Chart 3).

Chart 3.

Financials have also gained in a weak market environment due to the steepening of the yield curve that benefits banks and other sectors in this group. I highlight here the Fidelity Select Banking Fund (FSRBX), as the top performer (Chart 4).

Chart 4.

Click here to view the rankings of all Fidelity sector funds. The performance comparisons are updated daily utilizing the momentum screen at FidelitySectorReport.com.

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Sector Rotation: Energy Services is the Best-Performing Sector

The comparison of the three-month returns of the 40 Fidelity Select sector funds shows a wide performance gap between the best and the worst sectors:

Investments in natural resources gained the most. The combination of the rollout of COVID19 vaccinations, expectations for additional fiscal stimulus, and a rebounding economy can continue to fuel the gains, in our view. In this group, the Fidelity Select Energy Services Fund (FSESX) is the top performer (Chart 1).

Chart 1.

Higher interest rates and the steepening of the yield curve benefitted stocks in financial services. The Fidelity Select Banking Fund (FSRBX) shows the best gain in this group (Chart 2).

Chart 2.

The rebound of economic activity, higher savings rates, and anticipated easing of the pandemic related restrictions can further increase consumer spending. Travel and other leisure investments are especially poised for a rebound. We think that the Fidelity Select Consumer Discretionary Fund (FSCPX) is positioned well for a strong performance in 2021 (chart 4).

Chart 3.

The weakest sector fund in our survey is the Fidelity Select Gold Fund (FSAGX), as the relative performance of gold stocks vs. the S&P 500 index (shown in the bottom panel of Chart 4) continues to trend lower.

Chart 4.

Click here to view the rankings of all Fidelity sector funds. The performance comparisons are updated daily utilizing the momentum screen at FidelitySectorReport.com.

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