2022 starting off to the downside

George Kessarios
Chief Economist & Fund Manager

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Just 1 week into 2022 and something interesting is happening. The rotation we have been witnessing for some time now has accelerated. While financial sites report a rotation from growth to value, I see it as an exodos from ultra-high valuation stocks to something else.

So far the S&P 500 has retreated by about 2.5%, the Wilshire 4500 index 4%, The Nasdaq 100 5.5%, but the ARKK innovation ETF has corrected by 13%. And that’s on top of the 25% slide in 2021.

Again, while the headlines point to the fact that this correction in growth stocks is the result of monetary policy, the truth is that it is probably more of a return to reality and investors becoming less complacent. Investors have been complacent for the past several years now, but at the end of the day valuation gravity always comes into play. And that is what I think is happening.

And the question is, what might happen if the mega-cap stocks start to fall also? Will that take down the entire market down or will the money flow to other names thus acting as a cushion at the index level?

Because if the rotation becomes a self-fulfilling prophecy, then eventually even mega caps will also correct, for no other reason than sentiment as opposed to anything wrong with their business. Remember we said Fed policy is probably a headwind in 2022. And while the mega cap stocks are not in bubble territory as many of the stocks that have correct by 80% recently, they are not cheap. Yes, there is the possibility that they could correct by 20% or more, and yes that will probably bring down the major indexes. But also keep in mind that just as many stocks corrected in 2021 with the major indexes up, many stocks can go up even as the major indexes go down.

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