Weekly Update

Selloff in Growth Stocks Expands to Broad Market

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Published January 21, 2022


Markets have struggled mightily so far in 2022 as looming Fed policy changes merge with Omicron-fueled slowdowns and Russia-Ukraine tensions to put investors on edge. Growth stocks, presumably more sensitive to rising interest rates, have stumbled the most. The monthly chart below shows the small-cap growth index breaking down on the far right of the chart and off at least a whopping -10% so far in January.

Small-cap growth index breaking down

This same breakdown is seen in the Nasdaq and other large-cap growth stock indexes. What began as a rotation from growth stocks to value stocks evolved this week into a broad market selloff. So far, at least, the broad market S&P 500 remains above its longer-term trendline, though that line is quickly coming into view.

S&P 500 remains above its longer-term trendline

Of note, international stock markets have been substantially less affected by the U.S. market selloff as shown below, helped by the more commodity-heavy emerging market index, which is still positive for the month.

International stock markets not affected by the U.S. market selloff

It appears the Omicron impact will pass as we get into spring. But the Fed will be just beginning to move from talk to action on interest rates. The central bank is expected to begin a series of interest rates hikes at their March meeting. While the transition from easy money to a stiffer policy is largely already baked into rates, stock markets tend to become volatile as they digest the shift. However, it’s not all bad news. Markets adjust and typically do fine after the initial transition period as this chart from Fidelity shows. We are currently in the ‘3 months prior’ period with March as the target start of Fed tightening. The message is that come this summer, stocks should have gotten used to the new interest rate regime, though the path of inflation likely will still be a concern.

Equity performance around Fed tightening


Market Update

The old saying that stocks take the stairs up and an elevator down certainly was on display this week. Coming back from a Monday holiday, stocks resumed their recent theme with interest rates pushed upward leading to a selloff in growth-related shares. The Nasdaq, home of the largest of the high-growth companies, tumbled -2.6% on the day. A couple of earnings misses from the recently favored financial sector expanded the selling into the broader market. Earnings reports delivered mixed responses Wednesday with Proctor & Gamble (PG) rising strongly while Bank of America (BAC) and Morgan Stanley (MS) found investors enthused by their reports. Interest rates dropped back. But that did not deter the bears from slamming stocks in the afternoon, turning a positive day to a -1% loss. And again Thursday as stocks were in positive territory until the final hour of the trading day. Sellers came out in force to push stocks downward, lopping another -1% off the indexes. A huge disappointment in subscriber growth saw Netflix (NFLX) shares open sharply lower, yet another drag on the Nasdaq. A mid-morning rally effort fizzled and sellers once more sent stocks reeling to a -1.9% slide Friday. Of note, interest rates on the 5-and-10 year notes actually were flat to down on the week. Thus, it wasn’t a fresh hike that hurt stocks, more just an ongoing repositioning as investors seek to get ahead of Fed moves later this year.

A draining week for stock investors found the S&P 500 (SPY) lower by -5.75% to rest on its 200-day moving average. The Nasdaq 100 (QQQ) continues to be the epicenter of the selling, this week giving back -7.45%. Smallcap stocks (IWM) broke sharply lower, losing -8.08% for the week and returning all of.

Warm wishes and until next week.