A bruising week for growth investors as the market rotation continued.
Rising inflation fears caused relatively dormant treasury yields to rise at the fastest pace in over three months. The rate of the most recent rise in yields rather than the overall level itself prompted a further rotation out of some of last year’s biggest winners into value and cyclical stocks.
Despite inflation and yields still being low by historical standards, the recent jump resulted in some violent volatility over the week. Many investors were simply waiting for any excuse to push the giant red button, ejecting them out of some of the stay-at-home winners and into stocks that arguably have more room to run from a valuation standpoint.
The S&P fell 2.4%, with the tech-heavy Nasdaq falling 4.9%, its worst week in four months.
Context is everything. Solely focusing on the weekly pullback creates an overly dramatic storyline here. U.S. and global equities reached record highs earlier in February, and despite the recent sell-off, equities have delivered positive returns in February and YTD. Volatility is always likely given current valuations, but the fundamentals that underpin these valuations continue to improve.
Finally, GameStop was front and centre again this week as the “stonks’ trade was momentarily back in favour. Shares doubled on Wednesday, and the gaming retailer was almost 90% higher at its session peak on Thursday but pared gains to close up 18.6%.
The rotation trades of late pushed the S&P value index up more than 7% in February, with the S&P Growth Index remaining flat over the month. While this is potentially just a short-term shift, it has helped reverse some of the growth outperformance the has crippled value investors in recent years. Despite the recent surge, the rotation into value still has room to run with sectors such as financials, industrials and energy likely benefit as economic metrics continue to pick up.
An uptick in U.S. government bond yields had fed through to a higher dollar until earlier this month when the greenback resumed its decline against the backdrop of a looming U.S. fiscal stimulus package. Fears over a precipitous Dollar devaluation look set to remain a major headwind for the world’s reserve currency of choice.
1.46%US 10Y TREASURY YIELD
Yields jumped sharply higher this week, pushing bond valuations lower. Nominal 10-year US yields rose 11bps to end the week at 1.46%, and at one point reached 1.61%, the highest level in more than a year.
Bitcoin recorded its worst week since March 2020. The crypto corrected sharply as investors took profits following an extraordinary run, with price skyrocketing over 1000% in just over a year.
The downward pressure we saw last week was due to rising interest rates, an environment that would typically push investors towards bonds and other less-risky assets. However, a fall in Treasury yields from their recent highs late on Friday signalled a return to riskier assets.
Markets opened higher this morning as Johnson & Johnson’s single-dose shot vaccine became the third authorized COVID-19 vaccine in the United States over the weekend. The approval of a new COVID-19 vaccine has increased hopes of an accelerating vaccine roll-out, fueling optimism over a swift economic recovery. Shares of the suppressed market names, including Carnival Corp, Royal Caribbean, Hilton, Delta Air Lines and American Airlines, gained between 1% and 5% premarket.
While the recent sell-off in some of the big winners of 2020 may be unsettling for those invested in these companies, it is a normal market function. The growth story of any stock will never be entirely linear; it will be littered with dips. For Tech stocks that have seen mammoth growth in recent times, the endless upward trajectory was unsustainable at current rates and inflation fears early in the week just applied the brakes to allow for a cooling-off period. As always, if you are passionate about the stock and the companies long-term future, these market corrections should be seen as buying opportunities.