Each year, best Fidelity Select funds on average beat the S&P 500 by 43%, that is 4300 basis points. Fidelity Select Technology leads the performance table in 2020 with a year-to-date return of 62%. This compares with a gain of 16% for the Fidelity 500 Index Fund. Which funds are likely to take honors as best Fidelity Select Funds in 2021?
The COVID-19 pandemic made the year 2020 like no other.
The year has been a challenging one for many parts of the economy.
Yet, 2020 comes across as a good year for financial markets.
Except for commodities, most of the asset classes are up this year.
U. S. stocks large & small, U. S. bonds, and international stocks are higher than they were at the start of 2020.
With just a few more trading days to go, Fidelity 500 Index Fund (FXAIX) that tracks the S&P 500 index ($SPX) is up 16% for the year.
Best Fidelity Select Funds of 2020
The coronavirus upended economic and market forecasts made at the start of 2020.
Economies contracted sharply, and stock prices swooned as states across the U. S. shut down to mitigate the damage.
Monetary and fiscal stimulus followed. The Federal Reserve cut interest rates to near-zero. Congress passed the $2.2 trillion CARES Act.
Stock prices then recovered, led by shares of large companies benefiting from the digital economy.
The stock price rally broadened as hopes of COVID-19 vaccines improved in the fourth quarter. The groups hurt most by the pandemic rallied sharply.
As of December 21, the five top performers among Fidelity sector funds consist of Fidelity Select funds focusing on the consumer discretionary, health care, and information technology sectors.
Fidelity Select Technology (FSPTX), with a year-to-date return of 62%, leads the performance table. Fidelity Select Software and IT Services (FSCSX) from the information technology sector is in third place with a 44% gain.
Fidelity Select Automotive (FSAVX) and Fidelity Select Retailing (FSRPX) from the consumer discretionary sector claim the second and fourth spots.
The sole health care entry, Fidelity Select Biotechnology (FBIOX), is in fifth place with a 43% gain.
Thirty of the 45 Fidelity sector funds in operation for all of 2020 are in the black.
Sectors and groups hurt most by the pandemic are at the bottom of the 2020 performance table.
They include petroleum producers, airlines, and non-residential real estate as travel & entertainment demand fell off a cliff.
Fidelity Select Natural Gas (FSNGX) is at the bottom of the performance table, with a 40% year-to-date decline.
Fidelity Select Funds: The Market Milieu in 2021
Stocks have come around full-circle in 2020 and are ending the year on a high note.
On December 17, all four major U. S. indexes, namely the S&P 500, DJIA, NASDAQ Composite, and Russell 2000, closed at their all-time highs.
Rising odds of vaccines taming COVID-19, unprecedented amounts of fiscal stimulus, and the prospect of continued near-zero interest rates have helped stocks to hold up in the face of rising COVID-19 cases this month.
So, what is in store for 2021? Will stock prices continue to rise or reverse? Which types of stocks can fare better?
Based on FactSet data as of December 18, analysts expect S&P 500 company earnings to fall 9.7% in the fourth quarter of 2020 from the year-ago period. They forecast falling year-over-year earnings comparisons to end in the fourth quarter.
Analysts forecast the S&P 500 members to record 16% year-over-year earnings growth in the first quarter of 2021.
The year-over-year earnings growth is expected to peak at nearly 45% in the second quarter before tapering to about 20% in the third and fourth quarters.
For all of 2021, analysts forecast S&P 500 company earnings to increase by nearly 22% as economies restart and benefits from pent-up demand accrue.
Stock prices, however, already appear to reflect this expected growth, if not more.
The S&P 500 members, on average, currently trade at a forward 12-month price-to-earnings (P/E) ratio of 22.1. This valuation ratio is above its 5-year and 10-year averages of 17.4 and 15.7, respectively.
The above suggests stock returns in 2021 can be in-line with 2022 earnings growth forecasts as long as the forward P/E ratio does not contract.
Near-zero interest rates are currently supporting the forward P/E ratio. Stocks will have trouble staying in the black in 2021 if macroeconomic changes compel investors to lower the forward P/E ratio.
For example, stock prices will fall 13% in 2021 if the forward P/E multiple returns to its 5-year average of 17.4, and analysts expect 2022 S&P 500 earnings to grow 10%.
In sum, 2021 offers a limited upside and a sizable downside.
Best Sectors for 2021
AlphaProfit uses its multi-dimensional sector evaluation and selection process to select industries and sectors with superior return potential. These selections help subscribers to protect and grow their assets with low volatility.
AlphaProfit’s sector evaluation & selection process currently favors investments in the health care and information technology sectors for 2021.
Health care: Health care stocks have lagged the broad market except for some biotech names and those involved in developing COVID-19 vaccines. According to Ned Davis Research, health care stocks are trading at a sizeable discount to their historical average. In this election year, investors have been concerned with President-elect Biden’s health care proposals and the possibility of a blue wave. The Democrats should end with a split congress or a narrow majority after the 2020 election is complete. This election result renders the likelihood of a health care overhaul unlikely and opens the possibility of health care stocks catching up and outperforming in 2021.
Information technology: Selected groups in the information technology sector are disproportionately large COVID-19 beneficiaries. Demand for PCs, gaming hardware, communication software, and online payment services has soared as adults and students shifted to work- and study-from-home. Looking beyond the pandemic, the growth of new technologies such as artificial intelligence, cybersecurity, and 5G wireless networks should continue as companies seek to enhance productivity and improve supply chain reliability. The valuation metrics for information technology stocks are, however, well above their historical average. As such, one must be selective on information technology investments in 2021.
Best Fidelity Select Funds for 2021
Investors can invest in Fidelity Select funds with latitude to invest across the entire sector such as Fidelity Select Health Care (FSPHX) and Fidelity Select Technology (FSPTX) to profit from the above trends.
However, investors can earn higher returns at lower volatility by targeting specific industries in the financial and information technology sectors.
On December 31, AlphaProfit will reconstitute its Fidelity Core and Fidelity Focus model portfolios with a mix of Fidelity Select funds to help Premium Service subscribers protect and grow their assets.
To get timely recommendations of best Fidelity funds in AlphaProfit’s Fidelity Core and Fidelity Focus model portfolios, subscribe to AlphaProfit Premium Service now.