Most importantly, the US stock market this year was heavily wiped out in high-growth companies that began in February. The huge rally in the S&P 500 was certainly impressive, but, let’s be honest – what’s new in that? Apart from a few bouts of volatility, the past decade has been a steady boom for index investors. What was unique this year was that there was a steady increase in the number of companies making new 52-week lows along with records in the broader market.
From what I can tell, 2022 will be worse.
The simplest reason for this is that many subjects are still in apparent technical decline. Look at ARK Invest’s flagship ARKK Fund, which best embodies the experience of holding a basket of high-growth companies in industries very popular among traders over the past two years. It is in a clear technical decline, with little sign of an upside.
What’s particularly interesting over the past two months is how the fund has been trading in lockstep with airline stocks. A year ago, these two were almost completely inversely related. When the virus threatens to reopen, airline stocks will go down, and investors will pile into growth stocks tied to the deflationary tech leadership dynamic – a theme that was also closely linked to speculative trading tied to incentives, which now Reversing.
Yet over the past 30 days the ARKK and JETS ETFs traded with a correlation as high as 0.9. One reason why the market is treating these opposite groups of companies equally is because they are two different types of “expensive” stocks. ARKK stocks are expensive based on valuation, and airlines are expensive relative to the health of their balance sheets.
They are also at risk in a rising interest rate environment. Expensive tech stocks are considered by many to be long-term assets and thus could fall out of favor with rate hikes — in fact, the peak for ARKK coincides with the big 2021 spike in Treasury yields — and airlines are even more so. are loaded with more debt, which will become a huge burden with the increase in rates.
Over the past month we saw cloud stocks flirt with a bear market and crypto assets look to risk another deep rest. The strongest sectors in the stock market are staples, health care and utilities, all traditionally defensive groups. While the S&P 500 is ending the year on a high note, 2022 promises to be a minefield for traders.