Growth stocks in particular have been pummeled so far this year due to fears about inflation slowing the economy.
The Nasdaq is now 9% below its recent all-time high, putting it in danger of falling into a correction, defined as 10% lower than its most recent peak. The Dow and S&P 500 are about 3% and 4% below their peak levels respectively.
“If the first week of the year is any indication of what to expect over the coming months, investors will have to be nimble in 2022, and be aware of any outsize exposure they may have to growth stocks,” said Solita Marcelli, chief investment officer of the Americas at UBS Global Wealth Management, in a report Monday.
It’s worth noting that two key value sectors, financial stocks and oil firms, are thriving.
The yield on the benchmark US 10-year Treasury bond rose to its highest level since January 2020, briefly topping the 1.8% level.
“Technology stocks have led the market for most of the past two years,” said analysts at the Morgan Stanley Wealth Management Global Investment Committee in a report Monday. They noted that lower interest rates and the work from home trend during the pandemic helped boost techs.
But the prospect of higher rates will be a problem for tech and other growth stocks going forward.
“Global policy tightening has outweighed Covid’s estimated toll on economic growth, and tech has begun to underperform,” the Morgan Stanley analysts wrote, adding that now is a time when investors should try to actively pick stocks stead of passively relying on the big indexes that are dominated by the tech leaders.
UBS’ Marcelli also noted that “valuations for growth companies should compress more rapidly relative to value stocks” as the Fed raises rates.
“And that is exactly what has happened in the first week of the year,” she said, adding that “more speculative, very rapidly growing, non-profitable tech companies have fallen even more” than the top techs of the Nasdaq.