Published January 14, 2022
Last week we discussed the interest rate surge taking place at the beginning of 2022. This surge has driven a major shift in favored sectors. Cyclical “value” sectors like energy and financials have become the market darlings.
As financial stocks ride increasing interest rates to new highs.
This shift to cheaper “value” stocks could portend a change in the years-long domination of the market by high-growth stocks like the FAANG group. FAANG stocks have become substantially more expensive over the past several years as shown here with price divided by forward earnings projections tripling since 2013.
This full embrace of this small group of stocks has propelled growth stocks to ever-higher heights, especially when compared to value. However, the ratio of value to growth may have bottomed after a period of accelerated weakness, as the chart below shows. The chart shows a rising line when value stocks are in favor; a declining line when growth stocks are winning, as they have been since the financial crisis of 2008.
Note that value stocks have attempted to regain the throne a couple of times over the past decade only to fall further behind. Are investors finally ready to shift away from the expensive high-growth stocks of the post-financial crisis market?
Stocks began the week with a continuation of the prior week’s tech-related selloff. The Nasdaq was down almost -3% Monday before sharply reversing course to close flat on the day, a significant win for the market. That positive bias flowed into Tuesday’s trade as Fed Chair Powell reiterated the central bank’s new aggressiveness in fighting inflation. Stocks closed Tuesday +0.9%. Wednesday was a stalling day as stocks appeared to hit resistance after two days of recovery. A monthly inflation report came in +7%, a very hot reading, though many analysts believe we are nearing the peak of the inflation numbers. The tech-focused selloff returned in force Thursday on little new information, and even a slight dip in interest rates. The Nasdaq tumbled -2.5% while the broader market slid -1.4%. Friday brought the first major earnings of the quarter with large banks reporting. Investor reactions were mixed. But the market overall held up closing slightly positive Friday.
A week of substantial volatility saw stocks close with surprisingly little change. The S&P 500 (SPY) dipped -0.29%. The Nasdaq (QQQ), under heavy pressure twice during the week, ended little changed at +0.04%. Smallcaps (IWM) are once again hugging the bottom of their year-long trading channel with a -0.81% fall.
Warm wishes and until next week.