With the S&P 500 down 7.79% since the start of 2022, it's starting to feel as though there's not much working in equity markets and we're not even all the way through the first month of the year.
Compounding those woes are the facts that previously high-octane growth and small-cap stocks are faltering in even more dramatic fashion than the broader market, but interest rate tightening likely right around the corner, some clients might feel as though they can't or shouldn't abandon equities.
Further vexing clients and perhaps some advisors in the early stages of 2022 are the following points. First, the Russell 1000 Index returned 10% in the fourth quarter. Second, January is part of the more favorable six-month stretch for stocks. In theory, stocks should be thriving right now. At the very least, things shouldn't be as bad as they are this month.
If there's a silver lining, it's that a turbulent January doesn't necessarily mean equities are in for a full year of weakness. On that note, advisors should be illuminating clients to the problem children (stocks) that are weighing on the market this month and why those names are in the offenders camp.
Prioritize Profitability, Pandemic Plays Go Poof
A big problem in equity markets to this point in 2022 is the evaporation of both sides of the coroanvirus trade. That is to say neither previously beloved stay-at-home stocks nor the reopening trades are working. Exihibts A and B in the faltering stay-at-home trade are Pelton (NASDAQ:PTON) and Zoom (NASDAQ:ZM).
“One of the 'pain' stocks is Peloton, purveyor of stay-at-home exercise bikes. It has cratered to around $31 in a total nightmare of a ride from last winter’s highs in the $160s,” says Jeff Weniger, WisdomTree head of equity strategy. “Another lockdown play, Zoom, has tumbled to $160 from as high as $559 a little more than a year ago.”
As Weniger notes, the pain in the stay-at-home trade isn't benefiting reopening names. In fact, stocks in the latter category are enduring plenty of punishment in their own rights.
“If lockdown stocks like Peloton and Zoom are cratering, you’d think maybe it’s because 'reopening stocks' are catching a bid. Not exactly. Among the S&P 500’s worst performers in the last three months are Penn National and Caesars, both in the casino business,” he adds. “You can fly to their facilities on Southwest, whose stock is down to $46 from $64 last spring. Two cruise lines, Norwegian and Carnival, are also notable for having recently fallen out of bed.”
Another issue coming home to roost this month is profitability or lack thereof. If a highly profitable, cash-rich company like Apple (NASDAQ:AAPL) is down 8.54% year-to-date, it's reasonable to assume market participants are repudiating emerging growth companies that are losing money and have murky timelines to profitability. Investors' disdain for money-losing companies is one credible reason the nearly half the Russell 2000 Index is down at least 10% this month.
Make the Quality Call
In times like these, advisors can really show their mettle and add value for clients. Of course, that requires having a plan and that plan should include quality.
“We have noticed a downside/upside capture phenomenon in the WisdomTree U.S. Value Fund (WTV), which screens for shareholder yield and the WisdomTree U.S. Quality Dividend Growth Fund (DGRW). In recent months, the market’s down days often saw WTV and DGRW hold up better than the S&P. Then they would lag on a chunk of the up days,” observes Weniger.
For clients that need convincing, those exchange traded funds and the S&P 500 Quality Index are holding up better than the broader market this month.