Investors Brace for More Market Tumult as Interest Rates Keep Rising

The Federal Reserve has raised interest rates to their highest level since 2007, causing huge volatility across global markets and a plunge in assets ranging from stocks and bonds to cryptocurrencies. The turmoil that wiped out more than $12 trillion in value from the US stock market was the biggest drop since at least 2001 and is expected to continue as interest rates continue to rise.

The S&P 500 ended the year down 19%, ending years of near-continuous stock market rallying and the most speculative bet executions. rice field. Goldman Sachs analysts expect the S&P 500 to hit 4,000 by the end of 2023, up about 4% from the end of 2022.

Volatility has been particularly hard on market giants. Five big tech stocks accounted for about a quarter of the overall U.S. stock market decline last year, a sell-off reminiscent of the dot-com crash two decades ago.

Cryptocurrencies crashed, flashy initial public offerings nearly stopped, and blank check companies exploded at the end of the year. This was a stunning reversal of the mania that has dominated the market over the past two years.

“We are in a world where interest rates are here again,” said Ben Inker, co-head of asset allocation at Boston money manager GMO, which oversees $55 billion in assets.

One of the biggest flip-flops has happened under the surface of the market. Investors have abandoned the flashy tech and growth stocks that have driven the market’s rally over the past decade.

And value stocks, traditionally defined as trading at low multiples of book value or book value, have seen a resurgence after years of lackluster returns.

The Russell 3000 Value Index outperformed the Russell 3000 Growth Index by almost 20 percent, the largest margin in Dow Jones Market Data dating back to 2001.

Investors like Inker are looking for opportunities after the worst years in both stocks and bonds, but they say it’s just the beginning of a big stock market rotation.

Asset managers say they are positioning for an environment that bears little resemblance to what many have become accustomed to after the last financial crisis. The days of ultra-low interest rates, moderate inflation and accommodative Fed policy are over, and the market’s winners and losers are likely to rebalance for years to come, they say.

“A lot of investors were trying to justify nosebleed valuation levels,” said John Linehan, portfolio manager at T. Rowe Price..

Well, “future leadership will be more diverse.”

The Federal Reserve (Fed) will continue to raise rates, and has indicated plans to keep them going until the end of 2023. Many economists are predicting an upcoming recession, but Wall Street remains focused on whether inflation will recede after repeatedly underestimating its endurance.

Linehan said he expects the rally in value stocks to continue and sees opportunities in financial stocks thanks to higher interest rates. Some say the boom in energy stocks isn’t over yet. Energy stocks on the S&P 500 surged 59% last year, the highest ever growth.

Some investors expect bond yields to continue rising, which could hit tech stocks hard. These stocks are particularly vulnerable to rising interest rates, as they are often expected to make huge returns many years down the road. It is currently fragile in a world that emphasizes safe returns.

Yields on 10-year Treasuries ended 2022 at 3.826%, the biggest one-year rise in yields since at least 1977, but bond prices fell. From riskier corporate bonds to safer municipal bonds, yields have reached their highest levels in a decade, giving investors more options to store their cash.

Marc Ruschini, chief investment strategist at Janny Montgomery Scott, doesn’t believe technology will lead the next decade. “The one-size-fits-all mindset of buying broad technology indices or buying the Nasdaq 100 has changed.”

The tech-heavy Nasdaq 100 index is down 33% in 2022, trailing the broader S&P 500 by the widest margin since 2002.

Investors withdrew about $18 billion from mutual fund and exchange traded fund tracking technology through November, the largest annual outflow ever recorded by Morningstar Direct data dating back to 1993. A fund that tracks growth stocks recorded his largest $94 billion outflow since 2016.

Investors, meanwhile, are scouting the stock market for bargains and piling into value funds. Such funds marked his inflow of more than $30 billion, raising money for the second year in a row.

“Profitability and free cash flow will be very important next year,” said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments.

Wade said he expects another difficult year with the Fed being more aggressive than many investors currently expect. She thinks growth stocks may rebound if the Federal Reserve suspends rate hikes next year.

Other investors are heeding the lessons of the years after the tech bubble burst, when value stocks outperformed growth stocks.

Data from Bespoke Investment Group dating back to 2010 shows stocks in the energy, financials, materials and telecommunications sectors still look cheap compared to broader benchmarks. .

In addition, the tech giant faces increased competition and potentially tougher regulation, which could disappoint investors who have had high hopes for the group.

Analysts at Goldman Sachs said in a recent note that their impressive sales growth would be similarly spoiled. Megacap technology stock’s total sales growth is projected to rise 8% in 2022, trailing his 13% gain in the broader index.

“I doubt the winners of the previous administration will be the winners of tomorrow,” said Eddie Parkin, chief investment officer at Eaton Vance Equities. “They are still too expensive.”

Write to Gunjan Banerji at [email protected].