5 Stock Market Sectors To Watch In 2021

By most measures, 2020 was a successful year for investors. The S&P 500 was up 18%. The Russell 2000 did even better gaining 20%. Gold was up 24%. Silver was up 47%. Long-term Treasuries were up 18%.

Of course, there weren’t gains across the board. The energy sector fell more than 30%. Defensive sectors, including real estate and utilities, were virtually flat on the year. Value returned a scant 1%.

While equities posted big returns last year despite a deep recession that resulted in a 30%+ drop in GDP in the 2nd quarter, the major brokerage houses are all forecasting more gains in 2021. That could certainly happen, especially if the COVID-19 vaccine keeps the global economic recovery intact, but stocks are very expensive and it’s looking like the current recovery is slowing.

Risks remain high, but there are opportunities for outperformance in the new year. Many investors may be focusing on last year’s winners, large-cap growth and tech in particular, but I think we’ll see some rotation into international stocks and cyclicals.

These are five sectors that I’ll be favoring in 2021.

Gold Miners

This group was one of my top picks in 2020, but I think this group is well-poised to continue its run. Gold miners gained 23%, but junior gold miners were up 30%.

With trillions of dollars in stimulus making its way in the economy and the dollar weakening, conditions are right for precious metals to run higher. For the first time in years, gold miners are cash flow generators and still looking very cheap relative to historical levels.

ETF to buy: VanEck Vectors Junior Gold Miners ETF (GDXJ)

Emerging Markets

Emerging markets were dead money for roughly 13 years before the 2nd half rally of 2020. The narrative for emerging markets in 2021 is pretty straightforward. Economic growth is expected to be above average over the next few years, fueled by gains from China, while stocks are trading at around a 30-40% discount to the S&P 500.

On top of that, the dollar is down 13% from its 2020 high and I expect the declines in the dollar index to continue in 2021. That’s just another tailwind for emerging markets on top of fundamental attractiveness.

ETF to buy: iShares Core MSCI Emerging Markets ETF (IEMG)

Financials

The financial sector has been a consistent loser for years as record low interest rates make it difficult to generate profits. The current pandemic has resulted in much tighter lending standards, further impacting the outlook for banks.

But higher inflation rates in housing, food and medical expenses are threatening to push interest rates significantly higher in 2021, providing a boost for banks. Add in the additional pressures being placed by all that government stimulus could push rates higher as well.

ETF to buy: Invesco KBW Bank ETF (KBWB)

Energy

The energy sector has been the worst performing S&P 500 group for three straight years. Only twice in the past two decades has a sector been worst performer even twice. Financials did it back during the financial crisis, but came back the next year to post a 15% gain. The other instance was (surprise) the energy sector 2014 & 2015, but it managed by the top performing sector of 2016 gaining 24%.

Is it likely to happen in again in 2021? Who knows, but there’s a fair amount of value here and a cyclical recovery would really help this group.

ETF to buy: Invesco S&P 500 Equal Weight Energy ETF (RYE)

Dividend Stocks

Dividend stocks are typically overweight in cyclicals, especially financials and energy. If I’m hopeful about energy and financials, I almost have to be bullish on dividend stocks by default.

With Treasury yields still near record lows, I think investors might start rotating back into equities to find higher yields. But dividend ETFs likely need a cyclical recovery in order to outperform in 2021.

ETF to buy: Schwab U.S. Dividend Equity ETF (SCHD)