Thursday's Market Minute: 2021's Biggest Story Isn't Over Yet

The most important thing that happened in the U.S. stock market this year was the extreme wipeout in high-growth companies that began in February. The huge rally in the S&P 500 was, of course, impressive, but let’s be honest – what’s new about that? Apart from a few bouts of volatility, the past decade has been one steady ride up for index investors. What was unique this year was that the number of companies making new 52-week lows steadily rose alongside the records in the broad market.

From what I can tell, 2022 will bring further deterioration. The simplest reason for this is that many themes are still in clear technical downtrends. Look at ARK Invests flagship ARKK fund, which best embodies the experience of holding a basket of high-growth companies across industries that were very popular among traders the past two years. It’s in a clear technical downtrend, with little sign of emerging. What’s particularly interesting the past two months is how this fund has been trading in lockstep with airline stocks.

A year ago, these two were almost perfectly inversely related. Airline stocks would go down when the virus threatened the reopening, and investors would pile into growth stocks attached to the dynamic of deflationary tech leadership – a theme that was also closely associated with speculative trading tied to stimulus, which is now reversing. Yet over the past 30 days, the ARKK and JETS ETFs traded with a correlation as high as 0.9. One explanation for why the market is treating these seemingly opposite groups of companies the same is because they are two different kinds of “expensive” stocks. ARKK stocks are expensive on a valuation basis, and airlines are expensive relative to the health of their balance sheets. They’re also at risk in a rising interest rate environment.

Expensive tech stocks are considered by many to be long-duration assets and thus may fall out of favor as rates rise – indeed, the peak for ARKK coincides with 2021’s big spike in Treasury yields – and airlines are now even more loaded up on debt, which will become a bigger burden as rates go up. In the past month, we also saw cloud stocks flirt with a bear market and crypto assets look at risk of another deep unwind. The strongest sectors in the stock market are staples, health-care and utilities, all traditionally defensive groups. While the S&P 500 is ending the year on a high note, 2022 promises to be a minefield for traders.

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