What 2022 taught us about the equity market sector

at a glance

  • In 2022, equity markets experienced multiple, competing forces that created an inordinate amount of uncertainty, resulting in significant divergence in the performance of equity sectors.

  • CME Group’s Sector Futures provide a comprehensive toolset to capture opportunities and manage the risk affecting various equity index sectors

US equity markets grapple with the highest inflation in decades, key central bank policy decisions and slowing economic growth. This challenging set of macroeconomic factors has caused spreads across various equity sectors, which in turn have created trading opportunities for investors looking to manage sector-related risk.

During volatile times such as today, sector futures can be a useful tool as they provide the ability to go short or long. Highlighted below are examples of the CME Group suite of sector futures available to address some of the most active sectors for 2022. While the macro environment will inevitably evolve in 2023, market participants can learn from recent trends and use the sectors as investment tools. His portfolio in times of uncertainty.

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One way to observe trends in individual sectors is to look at the spread of each index. The spreads below illustrate the significant opportunities available to traders who want to structure their exposure and risk by sector, rather than simply trading the original S&P 500 Index. In this case, spread is a measure of how volatile each sector index’s price has been since the beginning of the year. The spread therefore provides a benchmark of how each sector has performed during 2022, and is important to consider in terms of how it may develop in 2023.

Energy Stocks Had a Strong Year

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As shown above, if we’re ranking the magnitude of spread, the energy sector wins the top prize. Energy’s positive aversion can be attributed to the outperformance of energy stocks this year, which has propelled the S&P Energy Select Sector Index to gain more than 60% through November. In contrast, the S&P 500 is down about 15% year-to-date. The difference in index returns demonstrates the usefulness of trading sectors for an investor looking to hedge their risk and take advantage of sector-specific trends that may be overshadowed in a broad-based parent index like the S&P 500. Could

As of November 30, 2022, CME Group’s E-Mini S&P Energy Select Sector Futures volume was up nearly 30% year-to-date compared to the same time period in 2021, indicating a strong appetite for energy-related risks this year. Shows a growing need. Using sector futures, a participant can capture market opportunities in sectors such as energy, as well as protect against potential losses in poorly performing sectors, which ultimately facilitates a more thematic portfolio approach. While the energy sector has been the star performer in 2022, sectors such as real estate and technology have faced significant headwinds.

real estate and tech sector down

Mortgage rates are at their highest levels in years, and the phenomenon of rising rates is revealing a slowdown in the housing market. Additionally, the real estate market has suffered from a decline in commercial property, and commercial real estate investment trusts (REITs) in the index contributed to a 26% year-to-date decline in the S&P Real Estate Select Sector Index. . While inflation is showing signs of softening and interest rate hikes are potentially waning, the real estate market is likely to continue to experience volatility, whether these developments persist or in the opposite direction. CME Group has listed two different futures of the real estate sector. E-Mini Real Estate Select Sector Futures And dow jones real estate futuresProvides participants with multiple opportunities to manage their real estate exposure.

Technology stocks have also suffered in recent months after experiencing Elevated levels at the start of the pandemic, The S&P Technology Select Sector Index is down nearly 25% since the start of the year, with big names like Alphabet, Microsoft and Meta losing more than $2 trillion in combined market capitalisation.

apart from this, semiconductor market The volatility it has experienced since the start of the pandemic amid chip shortages and disrupted supply chains provides some context to its persistently negative spreads shown in the chart below. The performance of semiconductors is yet another example that highlights the topic of sector dispersion and why futures can be a useful tool in managing these different risks. The six sectors shown in the chart below were Recently introduced as Sector Futures To provide greater flexibility to investors in increasingly popular economic sectors.

The sector story of 2022 points to the growing need to manage sector-specific risk, and Sector futures are one way to do this, CME Group offers 19 different sector futures including E-Mini Select Sector, Select Industry, Dow Jones Real Estate and PHLX Semiconductor Sector futures.

An important recent development in the Sector Future suite is the introduction of derived block, which are available for trading on all CME Group Sector Futures. A derivative block is a block trade in which the price and volume of the trade depend on hedging transactions in the eligible respective market. This new trading functionality allows clients to access liquidity from the respective market thus helping in facilitating intraday execution of large orders. In addition to being traded through derivative blocks, CME Group’s sector futures can be traded on CME Globex outright, as blocks, and through basis trades on Index Closes (“BTICs”), which allow participants to Allows trading against the underlying index value. ,

A new year brings new developments in the market. However, as 2022 reminded us, uncertainty is ever-present in equity markets. Looking at individual sectors rather than just broad index performance can highlight risks and opportunities for investors, and help them manage risk accordingly.

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