After months of turmoil prompted by the prospect of a tighter Federal Reserve policy, investors faced a new challenge last week when Russia invaded Ukraine. The geopolitical crisis has jeopardized economic growth in Europe at a time when inflation is at a 40-year high and the Fed is set to raise interest rates for the first time since 2018.
The S&P 500 suffered its first correction — a fall of more than 10% from recent highs — in two years, while Russian stocks posted a historic crash, down a third. Oil prices crossed $100 for the first time since 2014, and wheat hit its highest level since 2012. Commodities such as nickel and aluminum also rose.
The attack is “causing chaos in financial markets,” said Ilya Fegin, managing director of Wallachbeth Capital, a New York-based brokerage firm.
Yet as the US stock index touched its week low on Thursday morning, a familiar pattern began to reshape itself. Many investors jumped back into the market, scrutinizing growth stocks and the speculative stocks that fell out of favor this year. Oil and other commodity prices fell from their highs. Friday’s closing bell rang, the technology-focused Nasdaq Composite and the broader S&P 500 were up for the week.
The S&P 500 gained 0.8% during the week after losing 5.4%, its biggest weekly return since September 2008.
The U-turn emphasizes that many investors are ready to dump the buoyant trades over the past two years, and it highlights a dilemma they are now facing. They may choose to stick with investments in slow-growing companies, which may have a bad interest rate cycle. Or, they may return to pandemic-era winners whose returns exceed all expectations and who continue to prosper at times despite concerns about high valuations and mixed fundamentals.
Even in light of the impressive comeback in the second half of the week, some hard facts remain. Nasdaq is down 12% in 2022; The S&P 500 is up 8%. Investors expect the Fed to raise rates in March — a process that is likely to be painful for some highly valued investments. This week, investor monthly jobs report and BJ’s Wholesale Club Holdings Inc. And will look at earnings from companies like Domino’s Pizza Inc. to gauge market momentum.
Many investors said they are questioning whether major indices have fallen too far, too bullish and whether trades that have soured over the past two months are bound to return. By one measure, the valuation of S&P 500 stocks fell below their five-year average for the first time since 2020, according to FactSet.
“Investors are looking at equity market valuations and starting to reevaluate particularly low-end segments of the markets,” said Eric Knutzen, Multiset Class Chief Investment Officer at Neuberger Berman.
Some stocks were among the biggest losers this year, leading to the end of the week. According to analysts at Bespoke Investment Group, the stock within the Russell 3000, which had its worst performance ever in 2022, jumped the most on Thursday, up nearly 7%.
Some of the most speculative segments of the market also made huge gains. Shares of Kathy Wood’s flagship fund, the ARK Innovation ETF, were up 4.7% for the week. The technology sector of the S&P 500 outperformed the broader market, and shares of some growth companies rebounded.
Individual and institutional investors jumped into the market. Of the $3.6 billion that investors poured into U.S. equity ETFs this week, nearly a fifth went to the ProShares UltraPro QQQ, which provides turbocharged exposure to Nasdaq, FactSet data through Thursday shows.
Tea. Rowe Price’s portfolio manager David Giroux said he has already sold shares of energy companies in his portfolio — which have outperformed this year — when buying tech stocks like Nvidia Corp., Apple Inc. and Amazon.com Inc.
He said he expects oil prices to fall in the coming year and a moderation in inflation, while slowing economic growth, helping tech stocks. He predicts that the major indices may still make gains for the year, recovering their huge losses.
“We have really fundamentally changed” our portfolio, Mr. Giroux said. “A year ago you would have seen a big bet on the value of [stocks], Now everyone loves that stuff—we’re selling that hand into a fist.”
Adding fuel to the bets, traders began to price in the low probability of a half percentage-point hike in interest rates in March, with some banking on geopolitical tensions to soften the magnitude of the Federal Reserve’s action.
The recent volatility has tested investors after a prolonged calm. After a sharp, sharp drop in a bear market in early 2020, the stock mainly went up for the next two years, reaching new highs in 2022.
According to Dow Jones market data, the recent sell-off – with the S&P 500 down 8.6% from its highs – has lasted 37 trading days, compared to 23 trading days that took the gauge to the bottom in early 2020.
And many warn that the swing may be far from finished. The outcome of the war between Russia and Ukraine is unclear, and many investors are concerned about rising interest rates. Although stock valuations have fallen, they remain above historical levels.
Under the surface of the stock market, the turmoil is more pronounced. According to Dow Jones market data, about 67% of stocks in the Nasdaq and 29% of stocks in the S&P 500 are down at least 20% from their highs.
Despite the turmoil, many investors have stepped in to buy, looking for opportunities to scoop up beaten-down stocks. This has given rise to some of the biggest intraday reversals of the last 15 years in the first weeks of 2022. On Thursday, the Nasdaq intraday was down more than 3% and ended the session by roughly the same amount, something that hasn’t happened since 2008, during the depths of the global financial crisis.
On Thursday and Friday, some traders locked in profits on bearish trades instead of loading up on stock insurance they had previously placed, analysts said.
“You can see that people are waiting to buy this fall because nobody thinks it will last forever,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. It may end in “two weeks or it’s going to end in two months, but it’s going to end.”
Mr Ren said he took a bullish options trade on the shares on Thursday.
“When there is panic in the market, it pays to take some profit very quickly,” Mr. Ren said.
This story has been published without modification to the text from a wire agency feed
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