Suffice to say the last two weeks have been very tough. On the one hand, yes, of course some sort of correction or pullback has been expected given the huge progress the market – and growth stocks, small caps and IPOs in particular – have made over the last 12 months. But expecting something to come eventually and actually experiencing it are two entirely different things.
To be clear, broadly speaking the market is doing OK and the big-picture trend is still up. The S&P 500 and S&P 600 are just 5% off all-time highs, while the Nasdaq is off 11%. There is just a lot of action under the surface.
There is an eerie aspect to the current correction since it was precisely this time in 2020 when stocks began to fall apart. Of course, that was due to the beginning of the pandemic and associated lockdowns and now we are finally starting to emerge from the tunnel (we think). The situations are totally different in all sorts of ways. But the feeling investors have of “losing control” when stocks are appearing to melt down is likely still raw for many.
One of the practical differences of expecting versus experiencing is that when the markets start to correct, crazy things happen. Just like fundamentals can go out the window during a fierce rally they can evaporate during a correction. Some of this is driven by loads of investors hitting the sell button trying to protect gains and avoid losses. Some is driven by institutions moving money around, forced liquidations and other factors.
Point is, it can be difficult to make sense of things during a correction because often things don’t make sense in the very short-term. Corrections are a process, not a point in time, and they are messy.
On to a couple points on what’s happening now.
The most discussed catalysts driving the growth stock correction are rising interest rates, fears of inflation and ballooning national debt. There is a good deal of valuation reset mixed in, as well as rational profit taking. I suspect the rise of retail trading is also contributing to the volatility. We also have some fear of the unknown – we haven’t been through a pandemic recovery of this sort before and don’t know exactly how trends will evolve. Bottom line is there is uncertainty, which the market does not love.
Big picture, some inflation and higher-than-zero interest rates are good. History and the Fed are crystal clear on that. But the speed of increases, and the broader context of what’s happening in the market and economy are important.
On the topic of market performance during rising interest rates, the below data from Bank Of America Global Research is insightful.
The punchline is the data shows that stocks tend to do well during periods of rising interest rates. Notably, during the last six cycles of rising rates, dating back to 1995, the S&P 500 has gone up. Most of the time it has gone up a lot.
Now, what the Fed does with interest rate policy doesn’t always jive perfectly with what is happening with rates in the real world. Just reference the current state of affairs; 10-year Treasuries have jumped since January and are up from 0.7% six months ago to 1.56% today, yet the Fed hasn’t moved.
Eventually it will, and history shows that rising rates don’t signal the end of a bull market. While I’m far from being an economist my sense from observing and digesting research is that during this recovery, if yields continue to climb, the Fed will react. Maybe it will be another Operation Twist, maybe it will be something else.
Bottom line, I don’t think the Fed will stand by if the velocity of rising rates puts an economic recovery in jeopardy due to chaotic market events. One last point – it may also be that some tamping down of enthusiasm in the stock market is better in the long run than the alternative. Food for thought.
Enough big picture stuff. A couple notes on a few of our stocks.
It feels like the pendulum has swung too far to the downside with a number of our stocks. While I’m not a huge fan of trying to play the hero role and am absolutely maintaining a conservative stance, we have been somewhat conservative for a little while now so it may make sense to step up to the plate and take one or two swings, if you’re feeling a little under-invested.
Admittedly, these moves could work our poorly. But for those who want to take a few chances here’s what I’m thinking.
Accolade (ACCD). Just moved back to buy for filling first half of position a couple weeks ago. Moving to start to buy second half today. Stock could have more downside and this is a somewhat aggressive move, but for the risk-tolerant and patient investor it could work out. If ACCD were to fall much further (below 30 would be very bad) we would likely step away completely. BUY SECOND HALF
Avalara (AVLR). Fell to the 200-day line today. Barring full-fledged tech stock meltdown AVLR should find support here and this could be a decent entry point. For aggressive investors only moving back to buy. BUY
Q2 Holdings (QTWO). Fell to its 200-day line and is roughly 30% off its high. Moving back to buy. BUY
Also, next week be on the lookout for earnings from BioLife Solutions (BLFS).
Finally, clearly market conditions are fluid here so we’re taking things day by day. If you have any questions or market insights and/or opinions to share, as always don’t hesitate to shoot me an email.