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March has gotten off to quite the rough start. Last week, the S&P 500 fell 1.5%, and the Dow Industrials dropped 0.12%. Most notably, the Nasdaq plunged almost 5% in four days, as technology and health care stocks were under fierce pressure.
Our portfolios, which hold many technology and health care companies, had a difficult week as well. It is times like these that test our patience and discipline. We are reminded in James 1: “Consider it pure joy, my brothers, when you are involved in various trials, because you know that the testing of your faith produces endurance.”
We are certainly being tested! Yet, remember that losses exist only on paper if we don’t sell out of our positions. We anticipate a bounce back in the near future, so don’t get too down over this current rough patch.
First, let’s look at what caused the sell-off, and then examine what usually follows. The selling pressure this past week came from the continued fears over rising bond yields. The sell-off picked up steam after the Federal Reserve Bank (the Fed) commented that it would keep easy money policies in place for the foreseeable future. These policies have led to a weaker dollar, which in turn have led to higher commodity prices and inflation.
In 2021 alone, a “basket” of commodities including oil, copper, agriculture, and other metals is up 18%. The same “basket” is up 25% over the past year! The Fed has been in denial that inflation is a problem, because its figures exclude food and energy, two items we all spend a good portion of our income on.
After the Fed’s comments this past week, the 10-year Treasury hit 1.57%, while the 30-year yield hit 2.3%. Typically, rising rates have a harsh impact on interest rate sensitive value stocks (like financials and utilities). Surprisingly, growth and momentum stocks (technology, consumer discretionary, and health care) took it on the chin this time around.
This should be a short-term phenomenon. Typically, during a rising rate environment, growth stocks represent a more attractive investment, as they exhibit accelerating earnings and sales. So we still view this dip as a major buying opportunity. As we mentioned over the past few weeks, we were expecting a pullback during the first part of March, and we are anticipating a stronger second half of the month.
As we move into the end of the first quarter, there is typically higher demand for stocks from pension and institutional buyers. Additionally, analysts usually start revising earnings estimates later this month prior to first quarter earnings season starting mid-April. So far, according to FactSet Research, earnings have increased, on average, by over 5%. Higher earnings tend to lead toward higher stock prices.
These two factors should help boost stocks, as we head into the end of March. It’s not fun to be an investor during these rough patches, which could continue for another week or two. However, the silver lining is that we are heading toward springtime, a season of warmer weather and, generally, healthier stock prices. Hold tight.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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