Investors are plunging shares in many of the technology companies that rose during the pandemic as they move to banks, industry groups and energy producers whose fortunes are now linked to the economic recovery.
Even while the large indices used by investors to determine the strength of the US $ 54 tonne stock market seemed calm at the beginning of the year, the outlook for some of America’s largest companies has changed.
The violent rotation was driven in part by expectations that the Omicron coronavirus variant would be less disruptive to major global economies than previous strains of the virus.
The move has been strengthened through a sale in the $ 22tn treasury market, the backbone of the global financial system. With US government debt yields rising at the beginning of this year, the attractiveness of many unprofitable companies has plummeted – including many that were only recently announced. Their valuations are dependent on potential earnings in the future and therefore sensitive to rising interest rates.
“Spec-tech is destroying,” says Hani Redha, a portfolio manager at PineBridge Investments, referring to unprofitable, “speculative” technology companies with high valuations that are hardest hit.
A closely followed index compiled by Goldman Sachs, which tracks the returns of loss-making technology groups, is down 6 percent this year, well behind the 0.2 percent progress on the S&P 500. Shares of Berkshire Hathaway-backed software maker Snowflake fell 11 percent. percent in the first few days of 2022, while e-commerce groups Etsy and Farfetch both fell 10 percent.
Drug manufacturer Moderna and Covid test processor Quest Diagnostics, which both performed well last year, fell by 12 and 8 percent in 2022.
In contrast, investors pulled in to the shares of carmakers Ford and General Motors, as well as banks including Bank of America and Citigroup. The KBW Bank index rose almost 7 percent this year, closing a record high.
Companies in the travel and leisure industry, one of the hardest hit during the pandemic, also rose, with shares in American Airlines and United Airlines, as well as cruise operator Carnival, moving higher. A Goldman index of companies closely linked to the reopening of the US economy in 2021 – which includes shopping center operator Simon, hotel group Marriott International and aircraft manufacturer Boeing – has been nearly 5 percent higher so far this year.
Given the swing early in the year, bankers and investors warned that they were preparing for a bumpy ride over the first quarter. Many are square focused on the Federal Reserve, withdrawing support from the pandemic era that helped boost the stock market.
The sharp rise in bond yields in recent days has already fueled investors, with David Lebovitz, JPMorgan Asset Management strategist, saying it had “destabilized” growth and technology stocks. Yields on the 10-year treasury have climbed 0.17 percentage points so far in 2022, one of the biggest three-day gains recorded in the past year, according to Financial Times calculations.
“We are not going for the high planes,” Lebovitz added. “We go for the companies that can generate the earnings.”
The potential for further coronavirus mutations could also curb stock enthusiasm related to the health of the economic recovery, investors warned.
“Let’s admit it, there is still a considerable amount of uncertainty out there. . . the possibility of a new variant can be very problematic, ”says Kristina Hooper, global marketing strategist at Invesco. “And honestly, Fed normalization in itself will create greater volatility.”
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