Good economic news, robust corporate profits and massive cash on the sidelines mean that stocks could see a fourth year in a row of solid gains. But investors will need to monitor and navigate a variety of minefields, including higher inflation, lingering coronavirus outbreaks and disruptions in the global supply chain.

Bottom Line Personal asked top fund picker Janet M. Brown to identify the most prominent trends likely to affect the stock market this year and which no-load stock funds and exchange-traded funds (ETFs) are positioned to do best. Here are the key trends she is watching and her eight picks for 2022…

6 Key Trends

Energy stocks surge. The energy sector rose 46% through December 13, 2021, led by global oil giants such as Exxon and Chevron. It was, by far, the best-performing sector of the S&P 500, which returned 24%. Reason: Higher demand for oil in the post-pandemic recovery outstripped supply and drove up oil prices to more than $80 a barrel. It will take time for energy producers to ramp up activity and output, so we could see higher prices in 2022.

Small-cap value stocks benefit from the broad cyclical recovery. Pricey, fast-growing large stocks have dominated markets for nearly a decade. But small-cap value stocks soared 24% through December 13, and their valuations still are relatively cheap with an average price-to-earnings ratio of just 12 versus 22 for the S&P 500. As the economy comes roaring back, the jump in corporate profits for small companies could continue to surprise investors.

Pent-up demand drives heavy consumer spending. That’s likely to boost consumer discretionary stocks, which include non-essential goods and services such as air travel, automobiles and entertainment. US households actually ended the last recession and the pandemic in a stronger financial position than before the downturn. Despite high inflation, they may continue to catch up on delayed spending because confidence in the economy and their own financial prospects are strong.

Higher interest rates may be a catalyst for banks. The Federal Reserve expects to begin raising short-term interest rates in 2022. That’s good news for financial-services firms—they are likely to see their profit margins rise because they can hike the annual percentage rates (APRs) they charge on loans faster than the annual percentage yields (APYs) they offer on deposit accounts.

Megacap tech could take a breather. After a 32% gain last year, valuations for many big-tech stocks look stretched. However, certain areas of technology could continue to boom, including cloud software and digital payments.

ESG companies could lead the way. Environmental, social and governance (ESG) investing aims to identify the companies that are working to address some of today’s biggest challenges, such as climate change and cybersecurity. New ESG rules in Europe could continue to drive capital into sustainable investing.

Based on these trends, here are the most attractive equity funds now…

Aggressive investors

For investors who can handle sharp ups and downs, funds focused on narrow stock market niches could offer some of the strongest prospects for 2022. Consider putting up to 5% of your stock portfolio in one or more of these funds, depending on your particular investment goals and risk tolerance.

Fidelity Trend (FTRNX). Since 1958, this fund has utilized an unusual but highly profitable strategy. It invests in about 120 stocks that are tapping into long-term consumer and technological trends—many of which have accelerated due to the pandemic—such as the movement from cash to digital payments and higher spending on pets. Annualized performance: 25.6%* (one-year) and 19.7% (10-year).

Hennessy Small Cap Financial (HSFNX) holds more than 30 stocks, mostly small regional banks in fast-growing regions such as the Southeastern US. Small banks were up 32% last year and should continue to do well because of rising profit margins and increased merger-and-acquisitions activity. High turnover makes the fund more suitable for tax-deferred accounts. Annualized performance: 40.4% (one-year) and 13.3% (10-year).

Vanguard Energy ETF (VDE) tracks an index of about 95 energy companies from oil-rig builders and drill-­equipment makers to oil refiners and transportation companies, with one-third of its assets devoted to Exxon Mobil and Chevron. The ETF is one of the cheapest options in its category with a 0.1% annual expense ratio. Annualized performance: 45% (one-year) and 0.5% (10-year).

Moderately Aggressive ­investors

The following funds, which invest in high-quality companies with solid balance sheets, have been about as volatile as the overall stock market. Long-term investors can use these funds as core holdings for the bulk of their stock allocations.

Ariel (ARGFX). Manager John ­Rogers invests like Warren Buffett but with a focus on small- and mid-cap value stocks and ESG factors. He invests in about 40 high-quality companies with strong brands, mostly financial and industrial names whose share prices have been beaten down by temporary problems. Annualized performance: 31% (one-year) and 14.6% (10-year).

Brown Advantage Sustainable Growth (BIAWX). Named one of the top sustainable funds by Morningstar in August 2021, this fund’s portfolio of about 35 stocks is dominated by fast-growing companies in areas such as cloud software, digital payments and e-commerce. These companies all score high marks in ESG criteria, which means that they treat their employees, the environment and society well. The fund’s managers believe socially responsible investing lowers risk and leads to growing revenues, cost reductions and consistency of earnings. Annualized performance: 34.6% (one-year) and 20.4% (since its 2012 inception).

Oakmark (OAKMX). Launched three decades ago, this large-and-mid-cap fund utilizes ESG criteria in its hunt for undervalued companies that have stronger earnings potential than investors realize. It holds about 50 stocks, mostly in the financial and other economically sensitive areas of the market. Annualized performance: 34.5% (one-year) and 15.7% (10-year).

Conservative investors

If you have less tolerance for volatility or worry that the stock market could stumble this year, these funds use a variety of risk-management strategies, from selling call options to switching to cash and bonds when stocks look overpriced.

FPA Crescent (FPACX). Fund manager Steven Romick has overseen this eclectic offering since 1993. He invests like a hedge-fund manager, considering any asset class, sector or geographic region where he sees opportunities, even shorting stocks and buying private equity. Right now, Romick has heavy exposure to financial and telecommunications stocks but also has about one-quarter of the portfolio’s assets in cash. The fund has been about 15% less volatile than the S&P 500 over the past decade. Annualized performance: 15.9% (one-year) and 9.4% (10-year).

Invesco S&P 500 BuyWrite ETF (PBP) uses a simple options strategy. It invests in the underlying securities in the S&P 500 Index, then generates income by selling call options against them. An option gives buyers the right to purchase the S&P 500 securities at a specific date in the future for a specific price. The Invesco ETF collects a fee for each option. While this approach may cap the fund’s upside performance, it aims to help the fund deliver positive returns in sideways or down markets. Over long periods of time, the fund has achieved high single-digit annualized returns with 30% less volatility than the S&P 500. Annualized performance: 19.8% (one-year) and 7% (10-year).

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