Sector Leaderboard Changed as Inflation Picked Up

U.S. Fed Chairman, Jerome Powell, has made it official: We can no longer label the period of current inflation as transitory. The Fed left interest rates unchanged in January, and Chairman counselled patience about next steps.

This impact of inflation is becoming apparent in sector performance. The first chart, below, shows the performance of the MSCI USA Information Technology (IT) and MSCI USA Real Estate Indexes from the end of March 2020 through Jan. 28, 2022. As the pandemic took hold, the IT sector stormed ahead as the demand for their products grew due to lockdowns and work-from-home restrictions.

As economies and societies began to emerge from the pandemic and consumer demand picked up again, along with concerns about inflation. Real estate has traditionally been seen as a possible inflation hedge, as companies in this sector have been able to increase income-growth levels from increasing rents. Since the end of March 2021, the U.S. real estate sector has kept pace with the faster moving IT sector, as you can see in the second chart.

Our research (1) also showed that more defensive sectors like healthcare and consumer staples outperformed in rising inflation environments. In December 2021, both outperformed IT and the broader U.S. market.