Saqib Ahmed Iqbal

NEW YORK, (Reuters) – Investors have piled in to traditionally defensive stocks over the past few weeks. This has fueled a rally that some fear may slow down in 2022.

The S&P 500’s top performing sectors this month are consumer staples, real estate investment trusts, healthcare and utilities. The sectors are popular choices during uncertain times and have seen a rise of 9% to 5% in December, outpacing the overall index’s growth of 5%.

By contrast, the S&P 500’s energy and information technology sectors, among the year’s best performers, are up 2.7% and 3.8% for December. In 2021, the broader index has risen 27% and is on track to record its third consecutive year of double-digit growth.

In recent weeks investors have been given plenty to be cautious about, with uncertainty surrounding the Omicron variant and rising inflation, along with a Federal Reserve shift that is hawkish, encouraging caution.

According to Refinitiv Lipper data, December saw net inflows of $697 million into the Consumer Staples Select Sector SPDR Fund. This puts it on track for having its strongest month since July. Net inflows to the Health Care Select Sector SPDR Fund were $963 Million this month, after it pulled $1.1 Billion in November. It was their best month since July.

However, some market participants believe that rallies in defensive stocks are likely to be a temporary phenomenon. They expect a unwinding of the rally in the early 2022, when investors return back to big tech and growth stock, which have led the markets higher for many years.

Horizon Investments’ portfolio manager Zachary Hill believes that some investors are attracted to defensive stocks because they believe fund managers take profits from winning positions, and then reallocate funds towards beaten names. This is a very common practice in the year end 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. Hill said, “That could be reversed in January.”

That theory makes sense this year, with the S&P’s energy and information technology sectors up 47% and 34% for the year, respectively. These gains are more impressive than the year-to date performance of utilities and REITs as well as healthcare, consumer staples, and healthcare.

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.

According to data, information technology has shown a 2.83% average increase in January but was among the least performing in December.

The information technology sector has seen a 4650% increase in value since 1990. Meanwhile, utilities have experienced a rise of 250%.

Sam Stovall (chief investment strategist, CFRA) stated, “People are more willing to accept risk in new months than they were in the last month of the year.”

The threat to recent rallies in defensive stocks may also be from higher Treasury yields. This could come with a Fed becoming more hawkish, and reduce the appeal of utilities and other industries that attract investors due to their relatively high dividends. Rob Haworth is senior investment strategist at U.S Bank Wealth Management.

In December, Reuters surveyed 60 fixed-income professionals and found that the yield of the U.S. benchmark 10-year note rose to 2.08% within the next twelve months. The yield for the benchmark U.S. 10-year note stood at 1.50% on Friday. Fed signaled that it would taper its asset purchases faster and will increase rates for 2022 by three times.

Some others, however, believe that an aggressive Fed might also impact the larger. This is because valuations have reached their highest levels in nearly two decades.

Analysts will be available at Morgan Stanley (NYSE:) They favored defensive stocks more than cyclicals as the Fed reduces monetary assistance from markets.

“Growth stocks would be more vulnerable to that tapering than defensive ones given their much higher valuations,” the bank’s analysts wrote.

Hill from Horizon Investments thinks stocks will become more volatile after the relatively calm year 2021. The S&P 500’s one-month volatility averaged 12.5 for the year, the lowest since 2017, according to Refinitiv data.

He stated that although it won’t be as straight as last year, the stock outlook is still broadly optimistic.