Looking at the year ahead, I expect a more normal (up and down) market pattern in 2015 than we had 2014. If your gaze never left the S&P 500, 2014 may have looked straightforward, with a market that was only on the up and up.
However, if you had looked inside the broad basket of the S&P 500, you would have seen its composite sectors telling a more dynamic and differentiated tale. The chart below illustrates this well.
There was one sector that underperformed, and another sector whose bottom line soared as a result. You can guess the underperforming sector: Energy. Oil prices were off more than 45% in 2014, and oil stocks fell in tandem. For instance, Fidelity Select Energy Portfolio (MUTF:FSENX) — a fund that tracks big energy names such as Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and Schlumberger Limited (NYSE:SLB) — was down 12.6%.
However, the energy sector’s pain was the transportation’s sectors gain. The year’s third best performing Fidelity Select sector fund was Fidelity Select Transportation (MUTF:FSRFX) — a fund which tracks invests in transportation companies such as Union Pacific Corporation (NYSE:UNP), FedEx Corporation (NYSE:FDX) and Delta Air Lines, Inc. (NYSE:DAL). FSRFX gained 34% in 2014.
There were other low-liars and high-fliers. Our biggest overweight position by sector, healthcare, trounced the S&P 500. Fidelity manager Eddie Yoon benefited from his growth-oriented tilt towards biotechnology — Fidelity Select Health Care Portfolio (MUTF:FSPHX) was up 32.9% in 2014. I’m not expecting a dramatic reversal of fortunes in this necessary sector.
However, I’m certainly not expecting the outsized returns we had in 2014 from this sector in 2015 — just returns that are outsized relative to the broader market.
Also in 2015, I expect consumer-related sectors to fare reasonably well. I think technology will experience more gains in 2015, driven by both consumer and business spending. But I’d be surprised to find the gains as robust as they were in 2014.
Sectors that are more interest-rate sensitive (financials, utilities, real estate investment trusts or REITs) may be much more volatile in 2015, but I’m not expecting the Fed to hike rates multiple times and aggressively. Instead, I think they’ll take it slow and steady and move based on facts on the ground, not pie-in-the-sky theories about what they should or shouldn’t do.
In speaking of REITs, I know there is a lot of pessimism about REITs in 2015 based on their performance in 2014 — for example, Fidelity Advisor Real Estate Fund (MUTF:FHETX) was up 30.1% in 2014 — and their general susceptibility to higher-rate environments. However, I think the economic drivers are in place to countermand any moderate rate hike risk. Demand for commercial and residential space is likely to increase, not decrease, in 2015. In the hands of expert managers, and in a small dose, I think investors will fare fine.
Now, just because I belabored the value of REITs, don’t think it’s my top sector pick for 2015, because it isn’t.
Healthcare is my top sector pick for 2015. Why? I like the necessary demographic and emerging market growth themes that bolster healthcare demand. Healthcare provides necessary goods and services for huge, worldwide demographics that are aging and whose collective demand isn’t slowing. In addition to aging boomers needing a youth-inducing crutch, we are continuing to new consumers in emerging markets who are demanding better healthcare. The demand for healthcare isn’t going away anytime soon. Further, the healthcare sector has had stellar absolute and risk-adjusted returns.
I think that if there was ever a time to hire proven active stock pickers and income managers, 2015 is that time. Buy an index, and you get all the risks. Buy a manager who can pick the best of the best in any given sector, and you can mitigate them.
Jim Lowell is the editor of Fidelity Investor. Sign up for Fidelity Investor today and you’ll also receive his free report on the top sector funds and ETFs for 2015.
