Over the past week, the S&P 500 is down by 3.5%. What’s interesting is that the Russell 2000 is down by 2.3% and the microcaps index (IWM) is down even less – 1.6%. This state of affairs was reflected in our portfolio which was up 2.1% over the past week.
Why is this happening? My hunch is that we are seeing some selling pressure from the Fed signaling that a taper is imminent, either at this meeting or the next. This has been leading to strength in rates which is pressuring many growth and income stocks.
BUT, this weakness is offset by an improving economic situation especially as coronavirus case counts continue to tumble.
Our universe of stocks doesn’t really benefit from lower rates as much as large-caps and mega-cap stocks. However, it does benefit from faster economic growth.
In terms of the market, I find small-cap and micro-cap relative strength often are found at important lows. Market selloffs are the best time for value-oriented investors to take large positions without causing the price in illiquid stocks to go higher.
In a nutshell, this is my hypothesis for last week’s action in terms of why it’s happening and the implications.
What’s interesting is that this selloff is happening right before Q4 which tends to be the most bullish quarter of the year. Although, the selloff looks mild on the surface. Underneath, there has been considerably more damaged as almost half of the stocks in the S&P 500 and Nasdaq are down by more than 20%.
Given that the longer-term fundamentals for stocks remain solid with earnings growth in 2022 and low rates, it makes sense that we are closer to the end of this selloff rather than the beginning.
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Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares were trading at $434.25 per share on Friday afternoon, up $5.11 (+1.19%). Year-to-date, SPY has gained 17.28%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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