Markets in a Minute
Visualizing S&P Performance in 2020, By Sector
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Visualizing S&P Performance in 2020, By Sector
With 2020 finally over, many are breathing a sigh of relief.
Investors faced a tumultuous year. Still, the S&P 500 finished strong with a 16% gain, outpacing its decade-long average by 4%. Many sectors that provided the new essentials—like online products, communication software and home materials—outperformed the market. It was, of course, a challenging year for other sectors including energy.
This Markets in a Minute graphic from New York Life Investments ranks the 2020 performance of every sector in the S&P 500 using data from S&P Global.
S&P Performance By Sector
As the world coped with devastating losses and uncertainty, how resilient were S&P 500 sectors?
Here’s how every sector performed, from top to bottom.
| S&P 500 Sector | 2020 Price Return | 2019 Price Return | 10-Year Annualized Returns | P/E (Trailing)* |
|---|---|---|---|---|
| Information Technology | 42.2% | 48.0% | 18.9% | 31.6 |
| Consumer Discretionary | 32.1% | 26.2% | 16.0% | 48.1 |
| Communication Services | 22.2% | 30.9% | 5.6% | 27.5 |
| Materials | 18.1% | 21.9% | 6.6% | 40.4 |
| Health Care | 11.4% | 18.7% | 13.8% | 25.3 |
| Industrials | 9.0% | 26.8% | 9.6% | 28.9 |
| Consumer Staples | 7.6% | 24.0% | 8.7% | 25.1 |
| Utilities | -2.8% | 22.2% | 7.2% | 21.1 |
| Financials | -4.1% | 29.2% | 8.6% | 15.3 |
| Real Estate | -5.2% | 24.9% | 6.6% | 36.3 |
| Energy | -37.3% | 7.6% | -5.6% | N/A |
| S&P 500 | 16.3% | 28.9% | 11.6% | 31.2 |
*Trailing P/E measures market value divided by the last 12 months of earnings
As no surprise, technology came out on top with over 42% returns for the year.
COVID-19’s economic impact benefited the sector as activities, from work to socializing, moved online. In 2020, the tech sector’s returns were more than double its 18.9% average over the last decade.
Consumer discretionary was also one of 2020’s top sectors. Home to online marketplace giants along with electric vehicle companies, it posted a 32.1% return—surpassing its 2019 gains.
With -37.3% returns, energy was the hardest hit of all. Historic demand disruptions, along with OPEC tensions led to sector weakness. Like energy, real estate had a difficult year. Still, after declining 40% in March, by year-end, the sector mostly rebounded with just 5% losses.
Why The Market Had a Strong Year
Looking back, one of the biggest questions baffling investors is: why did the market perform so well? A number of factors, including government stimulus, low interest rates, and vaccine expectations can all help explain some of its behavior.
Government Stimulus
In March, the U.S. government approved a $2.2 trillion CARES-Act relief package, breaking historical records for stimulus. This helped create optimism in the market as individuals, small-businesses and corporations received financial relief.
At the same time, the Federal Reserve extended its “quantitative easing” policies that it introduced in 2008. Quantitative easing is when the central bank buys a number of longer-term securities. This type of measure is designed to boost economic activity through injecting liquidity into the market.
In 2020, the Federal Reserve began purchasing corporate bonds and other assets—on top of treasuries and mortgage-backed securities (MBS)—for the first time ever. In fact, the Federal Reserve is now estimated to 34% of MBS in the U.S. to help protect American homeowners.
Low Interest Rates
Another force that may have contributed to S&P performance in 2020 was the Federal Reserve’s low-interest rate policy.
Low interest rates mean that borrowing costs are low, which can be favorable for business conditions. In September, the Federal Reserve announced a “lower for longer policy”, stating that it won’t raise rates until 2023.
Vaccine Expectations
The promise of a vaccine rollout has contributed to S&P 500 performance momentum, along with expectations that things could return to normal in 2021. It also corresponded with double-digit gains for the health care sector.
Though roadblocks and uncertainties remain, vaccine announcements in November also helped spur an uptick in the energy sector, which will be influenced by global vaccine efforts in the months ahead. This, in turn, will help travel resume to normal and spark oil & gas demand.
S&P Performance: What Comes Next in 2021
With the first year of the pandemic behind us, it’s hard to say how the story will continue.
As countries acquire vaccines, there is hope for S&P 500 performance, and future stimulus measures could prop up the stock market. Of course, both the containment of the virus and people feeling safe will have an outsized impact on S&P sectors in the shift to a post-pandemic world.
Markets in a Minute
Explainer: A Visual Introduction to Fed Tapering
Broadly speaking, Fed tapering is the reversal of quantitative easing. We show the history of Federal Reserve bond tapering and how it works.
Explainer: A Visual Introduction to Fed Tapering
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The Federal Reserve began tapering its large-scale asset purchases in November 2021, a move likely influenced by:
- Rising inflation
- Improving unemployment
- Strong U.S. GDP growth
More than $4 trillion in capital was injected into the economy through quantitative easing (QE), over the course of the pandemic, inflation is at 40-year highs, and unemployment levels hover below 4%.
As Fed policy responds to a recovering U.S. economy, this Markets in a Minute chart from New York Life Investments shows how Fed tapering works, and its impact on the economy.
How Fed Tapering Works
Fed tapering is the unwinding of the Federal Reserve’s large-scale asset purchases.
After the 2008 financial crisis, large scale asset purchases were introduced for the first time to inject liquidity into the market and help restore confidence. During the pandemic, they were introduced once more, at a rate of $120 billion per month.
Here’s how it works:
- The U.S. central bank buys government bonds typically in the form of Treasuries and mortgage-backed securities (MBS).
- This influx of demand leads to a rise in these bond prices and their yields (interest rates) fall.
- As this lowers the interest rate on the government bonds, what often follows is lower interest rates on loans for households and businesses.
- Lower rates stimulate spending.
- When the economy is running well, the bank may unwind asset purchases to help keep inflation low, otherwise known as Fed tapering.
Notably, Fed tapering and QE is hotly debated among economists. Those in favor say QE is a critical tool for stimulating the economy. Those against say that it inflates asset prices and contributes to inequality.
Inflation Levels
The consumer price index (CPI) rose 7% in December, the highest rise since 1982.
Given this increase, Lawrence Summers, former U.S. Treasury Secretary and Jason Furman, former chief economist for President Obama say that the Fed didn’t taper soon enough. Other financial heavyweights suggest this is just the beginning of a hawkish approach to inflation.
So how does Fed tapering impact inflation?
By tapering asset purchases, the amount of money circulating in the economy that can be used to borrow to buy a house or car is reduced. According to this theory, when there is less spending, inflation will gradually cool down.
Fed Tapering and Interest Rates
The Federal Reserve has outlined that it will taper asset purchases before it increases targets on short-term interest rates. By current estimates, interest rates could rise in March.
However, if the pandemic takes a turn for the worse, the Federal Reserve can shift direction. This gives the Fed time to assess how the market and economy will react before it raises rates.
To prevent the taper tantrum of 2013, which led to market volatility and U.S. dollar appreciation, Federal Reserve chair Jerome Powell has stated that the Fed must carefully communicate the sequence of QE and tapering to prevent any fear in the market.
When Doves Cry
Like the 1940s, the rise in money growth over the pandemic has been driven by government deficits. By contrast, leading up to the 2008 Global Financial Crisis or during the 1950s and 60s, the private sector spurred loan growth.
Monetary inflation can impact consumer prices and financial asset inflation.
As CPI and financial markets have soared over the pandemic, investors will be watching closely to see how Fed tapering impacts future monetary policy.
Markets in a Minute
Ranked: Real Estate Returns by Property Sector (2012-2021)
From residential to retail, are there patterns in real estate return on investment? We rank them by sector over the last decade to find out.
This infographic is available as a poster.
Real Estate Return on Investment by Sector
For the ninth year in a row, Americans say real estate is the best long-term investment.
However, what might be less clear to the average investor are the different types of investments available within the real estate sector, and how they compare. Real estate return on investment within property sectors has historically been uneven, and 2021 was no exception. While residential property soared, office real estate has performed relatively poorly.
Are there any patterns in the top performers over time?
This Markets in a Minute from New York Life Investments ranks real estate return on investment by sector over the last decade.
Sector Returns Over Time
We used data from the National Association of Real Estate Investment Trusts to show real estate return on investment by year. A real estate investment trust is a company that owns, operates, or finances income-producing real estate.
Here’s how total returns stack up by property sector, sorted from highest to lowest return in 2021.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Self Storage | 19.9% | 9.5% | 31.4% | 40.7% | -8.1% | 3.7% | 2.9% | 13.7% | 12.9% | 57.6% |
| Residential | 6.9% | -5.4% | 40.0% | 17.1% | 4.5% | 6.6% | 3.1% | 30.9% | -10.7% | 45.8% |
| Industrial | 31.3% | 7.4% | 21.0% | 2.6% | 30.7% | 20.6% | -2.5% | 48.7% | 12.2% | 45.4% |
| Retail | 26.7% | 1.9% | 27.6% | 4.6% | 1.0% | -4.8% | -5.0% | 10.7% | -25.2% | 41.9% |
| Diversified | 12.2% | 4.3% | 27.2% | -0.5% | 10.3% | -0.1% | -12.5% | 24.1% | -21.8% | 20.5% |
| Infrastructure | 29.9% | 4.8% | 20.2% | 3.7% | 10.0% | 35.4% | 7.0% | 42.0% | 7.3% | 18.6% |
| Timber | 37.1% | 7.9% | 8.6% | -7.0% | 8.3% | 21.9% | -32.0% | 42.0% | 10.3% | 16.4% |
| Mortgage | 19.9% | -2.0% | 17.9% | -8.9% | 22.9% | 19.8% | -2.5% | 21.3% | -18.8% | 14.7% |
| Office | 14.2% | 5.6% | 25.9% | 0.3% | 13.2% | 5.3% | -14.5% | 31.4% | -18.4% | 13.4% |
| Healthcare | 20.4% | -7.1% | 33.3% | -7.3% | 6.4% | 0.9% | 7.6% | 21.2% | -9.9% | 7.7% |
| Lodging/Resorts | 12.5% | 27.2% | 32.5% | -24.4% | 24.3% | 7.2% | -12.8% | 15.7% | -23.6% | 6.3% |
Data for 2021 is as of November 30. Specialty and data center sectors are excluded as this data was only available from 2015 onwards.
Self Storage real estate was the best performing sector for the last two years, and also performed well during the 2015 market correction. It tends to perform well when people’s lives are disrupted, such as when they’re moving for a new job, schooling, or due to marriage or divorce. In the case of COVID-19, self storage got an extra boost from people wanting more space in their home amid remote work.
Timber and Industrial real estate have been in the top three performing sectors for at least half of the last decade. Industrial real estate, a category including properties that enable the production, storage, and distribution of goods, has seen increased demand due to the rise of e-commerce. One estimate says the U.S. could require an extra billion square feet of warehouse space by 2025.
On the other hand, the Lodging/Resort sector has frequently been one of the bottom performers. A form of discretionary spending, hotel stays may be one of the first expenses people cut when the economy is in a downturn. This weakness was compounded by lockdown restrictions during the COVID-19 pandemic.
What is a Good Return on Investment in Real Estate?
In light of the above data, investors may be wondering which sectors are “the best” to invest in.
The short answer: it depends. Here’s how real estate return on investment has varied within sectors, using the minimum, median, and maximum returns. We’ve sorted the data from the highest to lowest standard deviation, a measure of risk.
While Timber and Self Storage have delivered strong returns, they have also been relatively risky, with some of the widest variations in returns.
Industrials have seen the highest median return, and their risk is about middle of the pack. The second highest median return goes to the Mortgage sector, which earns income from the interest on mortgages and mortgage-backed securities. The mortgage sector has seen less risk than most other real estate categories, at least in the last decade.
For investors with a lower risk tolerance, Infrastructure may be a sector to consider. These properties had a positive return on investment for all of the last 10 years, and had the lowest risk of any property sector.
Patterns Within Real Estate Return on Investment
By looking at historical patterns, investors can consider how economic conditions may affect real estate return on investment.
Sectors associated with discretionary spending, such as Retail and Lodging, have tended to perform poorly during downturns. On the other hand, Self Storage and Residential properties have historically been more resilient during the 2015 selloff and the COVID-19 pandemic.
Future trends may also offer food for thought. For example, as the population ages and the government puts an increased focus on critical facilities, could the Healthcare and Infrastructure sectors be poised for growth?
Whichever sector(s) an investor focuses in on, real estate serves as an alternative investment that can help diversify any portfolio.
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