Sat. Jan 22nd, 2022


Investors left a trade this week that has yielded huge returns since the financial crisis, abandoning shares of fast-growing technology companies in favor of steady businesses largely overlooked by Wall Street.

The technology-focused Nasdaq Composite lost 4.5 percent in the first five trading days of 2022, the worst annual debut since fears of a slowdown in China sent shock waves across global financial markets six years ago.

The technology tumbles came as U.S. government bond yields rose the most in 28 months, as concerns grew that the Federal Reserve would have to raise rates more aggressively than previously expected to tame hot inflation.

“A lot of the air has been let out,” said Jurrien Timmer, head of global macro strategy at Fidelity Investments. “[Speculative tech shares] went to the moon and now that liquidity tide is turning. ”

Technology stocks, especially those of fast-growing and loss-making companies whose high prices are based on the potential for future earnings, are seen as particularly susceptible to increases in rates that reduce those potential future returns. But importantly, this week, sales expanded to marquee technology names that are among the largest in U.S. stock indices, including Apple and Google owner Alphabet.

Bar graph of Difference in year-to-date performance of the Russell 1000 value and growth indices (%) showing investors decisively shifting to value at the beginning of the year

US 10-year treasury yields – a crucial measure of global assets – jumped from just 1.51 percent at the end of 2021 to a high of 1.8 percent, which obscured a post-pandemic peak in March.

“Many fixed-income players went on holiday in mid-December with Omicron, which was increasingly of an unknown quantity,” said Ludovic Colin, a portfolio manager at Vontobel Asset Management. “They came back in January and realized maybe it’s not that bad. . . That’s why we’re seeing returns wasted. ”

As fears of Omicron’s seriousness in markets diminished, so did Fed policy. moved to the forefront. Before 2021, the world’s major central bank had already indicated that it would begin to remove policy support from the crisis period faster – introduced into the depths of the coronavirus downturn – faster, which would usher in a new rate hike this year. .

Line graph of returns on the 10-year US Treasury (%) showing that treasuries sold dramatically and hit other markets

This week investors got take a closer look at the discussions that took place within the Fed in December. Minutes of the Federal Open Market Committee’s last meeting showed that policymakers may find reason to accelerate the pace of rate hikes. It may even begin this year to reduce the size of its balance sheet, which has doubled in size to nearly $ 9 billion since early 2020, thanks to the central bank’s massive bond-buying program that has helped support financial markets.

“The fact that they are talking about the balance sheet is very important,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée.

Conviction over rising rates strengthened Friday as US unemployment rate dropped to below 4 percent for the first time since it was first reported that the pandemic was on the U.S. coast in 2020, with signs of wage inflation building up in the labor market.

Line chart of US interest rates implied by trading in Sofr futures (%) showing that Traders are raising bets that the Fed will tighten policy in the coming years

As yields have risen, as well as the fortunes of previously unloved value stocks, as investors turned away from high-growth companies that were in vogue at the height of the pandemic. Shares of banks, oil companies, large industrial groups and especially those companies whose fate is closely intertwined with the reopening of the US economy, including airlines and shopping center operators, have all advanced.

Value stocks managed to make a profit in the first week of 2022 when the S&P 500 fell by 1.9 percent. In a sign of the strength of the market shift, the Russell 1000 value index outperformed its growth counterpart by more than 5 percentage points this year, most over the comparable period on records dating back to 1991, according to Bloomberg data.

Year-to-date performance line chart (%) showing that high-flying US technology stocks hit in sharp rotation

The breakout start to growth was particularly painful for funds invested in more risky corners of the $ 53tn US stock market. Shares of loss-making technology companies have already fallen by about a tenth this year, while recent initial public offerings are down 12 percent, according to closely followed indices compiled by Goldman Sachs. The bank estimates that companies that generated strong growth, despite the ups and downs of the U.S. economy, fell more than 8 percent.

Carpenter of Fidelity Investments said this kind of rotation is a “familiar story”.

“This happened in the late 1960s with the speculation about space and technology stocks. This happened in 2000. . . and usually the Fed plays a role because it is that segment of the market that suffers, ”he said.

One reason the market movement was so intense is because many mutual funds and hedge funds held concentrated positions in many of the same companies, analysts said.

“You were all trying to hit the exit at the same time,” said the head of stock trading at one New York-based bank. “Usually in a healthy market when hedge funds are relaxing, mutual funds try to come in and buy weakness and this has the effect of stabilization. But now. . . when hedge funds and pension funds start to relax risk, mutual funds go in the same direction. ”

The rotation was also sometimes confusing, with competing forces pushing and pulling investors in opposite directions and clouding the story for market movements. And investors have previously been given a taste of short-lived gains in stock prices, including at some point last year.

Line chart of Russell 1000 value index divided by Russell 1000 growth index showing After years of backlog US value stocks start to increase

This points to a bumpy road ahead, with increases and decreases in rates clashing with associated coronavirus threats to the economy.

“While I think the market can and will go higher, investors will have to navigate these rotations,” says Russ Koesterich, a portfolio manager at BlackRock. “Investors are partly taking their rope out of the bond market and the part of the market that is most susceptible to those shifts in rates is the speculative technology names.”



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