Tech Stocks Lead the Market Decline in Early 2022

February 7, 2022 |
2 minute read
|

2022 began with one of the worst market performance periods since 2009. While the tech-heavy NASDAQ index looks to finish January with a loss of around 10 percent, value equities will likely record one of their best starts in many years, driven by gains in the energy sector, and sparking a renewed discussion about a rotation from growth to value stocks.

Increasing energy prices caused by years of underinvestment and strong demand growth from consumers have finally created an environment where energy producers are growing revenue. At the same time, financial stocks, another value sector, are benefiting from rising interest rates. Treasury yields have quickly moved higher as investors expect that the Federal Reserve will lift rates earlier, increase the pace of tapering and begin to reduce its balance sheet in 2022. Just four months ago, market consensus was that the Fed would not begin to hike rates until 2023 and now the market expects three, four or even five 25-bps hikes this year, with speculation of a 50-bps hike in March. However, despite the recent leadership of value stocks, higher inflation and a tightening Fed stance, we believe investors are unlikely to abandon growth stocks in 2022, albeit with a shift in focus to higher quality companies. We’ve seen this scenario before. Over the past three decades, there were four periods of rate hikes by the Fed during which technology was among the best performers.   

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Concerns about a potential correction in the U.S. stock market have been ongoing for most of the past year as valuations remained expensive relative to history and the rest of the world.  Increasingly bearish positioning can now be seen in a variety of indicators, including the record volume of put options and the most bearish individual investor sentiment since the first half of 2020. However, when we look at the make-up of the decline, one can see that it was concentrated in the high-growth, no-profitability names. For example, our chart of the month shows that stocks with high sales growth and momentum factors, as measured by the difference in returns of the highest and lowest quintile of stocks in the S&P 500 index, declined by 8 and 7 percent in January. Additionally, the Goldman Sachs Non-Profitable Tech Index which consists of non-profitable U.S. listed companies in innovative industries was down 27 percent in January and 50 percent in the last year. The year-to-date sell-off appears to be mostly due to worsening sentiment toward some sectors, rather than the result of falling earnings, which are expected to climb by 19 percent in the fourth quarter vs. the prior year. When we look at the valuations of growth companies and value companies in the S&P 500 index, the price-to-earnings premium that growth equities commanded over value equities has returned to its pre-pandemic levels, erasing the impact of COVID-19. Nevertheless, fundamentals for equities overall remain strong as reflected in the attractive equity risk premium relative to bonds.     

At Commonfund, we strive for balanced factor exposures within our public equity portfolios. Specifically, our managers focus on companies with strong fundamentals and sustainable earnings growth while maintaining exposures to low-volatility strategies which have benefited so far from the erosion in investor sentiment. 

Visit our investment strategy page to learn more

Ivo C. Nenin

Author

Ivo C. Nenin

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

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To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.