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Thursday, December 29, 2022
Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared. Read this and more market news on the go with Yahoo Finance App.
Stocks sold off on Wednesday, with the Nasdaq Composite underperforming the Dow Jones Industrial Average yet again — a trend that encapsulates the biggest challenge of the investing year.
The Nasdaq is down 35% so far in 2022, while the Dow is off less than 10%. And this Dow outperformance relative to the tech index is by far the biggest gap since the dot-com bubble peaked and unwound from 2000 to 2002.
The explanation is relatively simple: The Fed is aggressively fighting inflation, which has clobbered tech and growth stocks this year. Meanwhile, energy names soared for most of 2022, while cyclical and defensive sectors like health care, industrials, materials, staples saw investor interest pick up in the fourth quarter.
For many investors, 2022 may simply seem to be an aberration, a pit stop on the Fed's track back to low interest rates, or what many investors now imagine is the norm after a decade of record low rates.
The thinking goes that once the Fed nips inflation in the bud, the central bank can restart the low interest rate incubator that launched hundreds of high-growth tech winners over the last decade-plus as cheap capital fueled land grabs for market share in new industries.
Markets are pricing in a Fed that finally cools on its rate hiking plans in 2023 — but that doesn't necessarily mean a return to the previous trading regime. With geopolitical risk on the rise — and COVID worries back in the headlines — the battle over inflation could turn out to be a multi-year affair, bleeding into the second half of this decade.
If that's the case, cyclical and defensive names may be the place to camp out for a few years.
And if the trends in the market both in 2022 and the year's final quarter are anything to go by, it seems some investors are catching on to this way of thinking.
Compare the year-to-date performance of the top 25 S&P 500 components by market cap to their respective quarter-to-date performance.
Dark red dominates the year to date returns — especially among the large cap names like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL).
Amazon (AMZN) has lost just over half its value this year, while Tesla (TSLA) and Meta Platforms (META) have seen their market value cut by two-thirds, pushing them outside the top 10 biggest stocks in the index after having crossed the $1 trillion mark last year.
All of those prior names — save for Microsoft — are sporting deep red returns for the quarter as well, which highlights the difficulty in relying on past winners this cycle.
And the outperformers are instructive, with Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) up 13% for the quarter. Despite its outsized holding in Apple stock, Berkshire hasn't been held back from gains this year thanks to its profitable financial, industrial, and energy holdings.
Health care, financials, energy, and consumer staples companies are all well-represented among the winners in the fourth quarter. Top performers include JPMorgan Chase (JPM), Merck (MRK), Exxon Mobil (XOM), and Proctor & Gamble (PG) — all up 20% or more.
Fast forward a year, and the leadership board will undoubtedly look quite different. But a return to the status quo of the 2010s is probably off the table.
The challenge for many investors operating in today's market is that sustained outperformance by value and cyclical stocks over growth stocks hasn't been seen in a generation.
Most investors simply have no memory of the last time this dynamic took hold, and therefore, no reference point for a time when tech wasn't the stock market's pre-eminent sector.
This leaves the table set for another year — or perhaps several — which looks decidedly unlike anything we've seen in decades.
What to Watch Today
Economy
8:30 a.m. ET: Initial Jobless Claims, week ended Dec. 24 (225,000 expected, 216,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended Dec. 17 (1.706 million expected, 1.672 million during prior week)
Earnings
No notable reports scheduled for release.
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