U.S. stocks endured their worst day of the year on Thursday as markets digested the latest monetary policy moves from the Fed to tackle soaring inflation. The Dow Jones tumbled over 1000 points, or 3.1%. Meanwhile, the S&P 500 and Nasdaq Composite lost 3.5% and 4.9%, respectively. The selloff came only a day after the Fed chair, Jerome Powell, announced the biggest hike to interest rates in 20 years to combat inflation. On Wednesday, the Federal Reserve raised its benchmark interest rate by half a percentage point- its most aggressive move yet in the fight against 40-year high inflation.
No Top Winners, Only Bottom Losers
None of Dow 30 stocks escaped the sell off. It was clear however that some sectors weathered the storm better than others. Dow listed stocks fell at an average of 3.3%. And yet, big tech and consumer discretionary stocks contributed well above their fair share of losses on the day. In the 1,063-point free fall, half of the biggest losers were tech giants.
Tech stocks were hit particularly hard on Thursday, with Amazon falling 7.6% and Tesla shedding 8.3% of its value. Salesforce and Apple were amongst the biggest decliners on a percentage basis, falling 7.1% and 5.6%, respectively. Home Depot was the biggest loser based on points. The home improvement retailer declined 5.1%, but its weighting knocked down the index by 113 points.
Microsoft didn’t appear to be a top loser on percentage points, trailing 5.2% on the day. However, its per-share price of $274.94 translated to a 99-point loss for the average. Meanwhile, healthcare giant, Merck, was hit the least during the sell off. The stock fell only 0.6%, translating to 4 points off the Dow. Energy stocks also proved to be a pillar of strength. Chevron, the multinational energy corporation, retreated only 0.9% to knock 10 points off the Dow. Coca-Cola stock also held its own. The soft drink manufacturer weathered only an 0.8% dip in its share price. The household name is famously a top pick stock for investment tycoon, Warren Buffet.
There’s a Clear Trend Emerging, and It Could Be a Signal of What’s to Come
The 1000 point sell off can be attributed to hollowing sentiment on Wall Street. Fears about the Fed’s policy moves, mixed earnings from some large growth companies and lockdowns in China have hammered Wall Street recently, even eclipsing the positives of a better-than-expected earnings season and a strengthening U.S. jobs market.
“Investors aren’t looking at fundamentals right now, and this is more of a sentiment issue,” remarked Megan Horneman, chief investment officer at Verdence Capital Advisors.
The CBOE Volatility index, also described as Wall Street’s fear gauge, recently climbed to 31.20 points. An index reading above 20 indicates higher incoming volatility, whilst a reading above 30 often denotes meaningful fear about what will happen to stocks in the short term. Now, investors are trying to navigate a market roiled by inflation, interest rates, geopolitical concerns and Covid. The overwhelming response has been to play defense. Industries like health, energy and financials have historically weathered volatile environments well, whereas the opposite is true for high growth technology stocks. In periods of rising interest rates and volatility, big tech is commonly left well alone, as rising rates negatively impact on future earnings potential of this sector specifically.
Navigating Through the Current Market
Buying the dip may be a tempting strategy, and one that’s highly overused during financial downturns. For now however, it’s a stance you might want to rethink. According to Paul Tudor Jones, the billionaire founder of Tudor Investment Corporation, it’s still not the right time to go all in with equities.
“You can’t think of a worse environment than where we are right now for financial assets… clearly you don’t want to own bonds and stocks.” Jones said in a CNBC interview.
Rather than pursuing a strategy of high returns, the hedge fund manager advises that protecting your wealth should be the focus. But for those that are adamant to invest, there is one approach to consider. That is to follow simple trend strategies. Trend-following simply means to purchase a security when its price trends upwards and selling it when its price retracts, capturing that difference in price. Investors with a larger risk appetite than most could consider these points and corresponding strategies.
High Interest Rate Investment Plays
First, the market is characterised as a high-inflation environment where the Fed is now forced to raise rates aggressively. That should attract investors towards stocks that do well in a high-inflation/ rising interest rate slowdown. It makes sense to look into the ProShares Equities for Rising Rates ETF (EQRR), which monitors the performance of the Nasdaq U.S. Large Cap Equities for Rising Rates Index. With a majority holding in financials and energy stocks, this ETF looks to outperform traditional large-cap indexes in times of rising U.S. treasury yields.
Second, Covid restrictions and geopolitical issues will end eventually. When that happens, analysts expect consumer discretionary stocks, such as Nike and Starbucks, to rally.
Energy Sector
Rising commodity prices has largely fueled inflation. In fact, energy was the S&P 500’s best-performing sector in 2021, returning 53% against the index’s 27% return. That momentum has even pushed into 2022. The Energy Select Sector SPDR Fund is up 37% from year to date. In comparison to the benchmark index, the S&P 500 has tumbled roughly 13%.
Assuming that the positive momentum in energy prices continues, this ETF could be a good investment to deliver market-topping returns in what would otherwise be a downwards market.
