High-multiple growth names crumbled again yesterday as investors brace for tighter monetary policy from the Federal Reserve.
Using TradeStation’s extensive library of fundamental and technical data, we compared S&P 500 members that fell at least 1 percent on Tuesday with the 1 percent gainers. The analysis showed that the gainers had less than half the valuation of decliners on three key metrics. (See the table below.)
Most of the big drops occurred in technology sector. Software companies like Adobe (ADBE), Fortinet (FTNT) and ServiceNow (NOW) were among those hit especially hard. They all trade for more than 50 times earnings and 15 times revenue. Meanwhile, insurers and lenders like Allstate (ALL) and Discover Financial (DFS) led to the upside.
The shift follows a noteworthy technical pattern for the SPDR Technology fund (XLK), which hit an all-time high of $175.58 early Monday. But it quickly reversed and closed below Friday’s low. That kind of bearish engulfing candle is a potential reversal pattern. (A similar candle appeared on November 22.)
Then vs. Now
The price action was reminiscent of patterns earlier in the year when surging interest rates drove investors from growth stocks to value plays. (This article explains why rising bond yields rates can weigh on stocks with higher multiples.)
However, there are some potentially important differences between early 2021 and the current market. The previous environment focused on small caps, energy, airlines and traditional retailers. These were more speculative and beaten down sectors, including “meme stocks” like GameStop (GME). The early 2021 value stocks were also more cyclical, benefiting from a quick economic acceleration.
Fast forward to late 2021, and investors are more conservative. They’re focusing on larger and less volatile stocks — especially health-care and consumer staples. After all, the Federal Reserve is widely expected to accelerate the pace of removing stimulus and move up interest-rate hikes. That could potentially hurt economically sensitive names.
In conclusion, growth stocks are falling again as interest rates rise. The current pattern has similarities with the trend earlier in the year, but this time investors are focusing on safe havens.
Source: TradeStation Data
This content is for informational and educational purposes only. This is not research or a recommendation regarding any investment or investment strategy. Any opinions expressed herein are those of the author and do not represent the views or opinions of TradeStation Securities, Inc. or any of its affiliates. Investing involves risks. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, digital assets, etc.); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here: www.tradestation.com/important-information.