Market Insights

The stock market hasn’t just pulled back in 2022. It’s also showing new trends as investors react to very different environment from recent years.

This article will highlight the new conditions and what they could mean for your money. Here’s the list:

1. Traditional companies are back in demand
2. Activists and value investing are back
3. Safe havens are breaking out

Before outlining the three trends, let’s consider the new conditions that have created them. First is the economy’s strong recovery from the coronavirus pandemic. The lockdowns of 2020 and 2021 not only caused millions of job losses. They also produced a shortage of physical products and caused a surplus of savings. The result has been demand-driven economic growth as consumers shop and businesses rebuild inventories.

The second is higher interest rates. The Federal Reserve has started a long string of projected rate hikes and balance-sheet reductions. This process could also mark the end of a 40-year decline in borrowing costs, which has supported a series of assets like stocks, real estate and bonds. While these changes may sound bearish on the surface, they’re creating potential opportunities in some long-neglected parts of the market.

Traditional Companies Are Back

One of the biggest trends of the last five years was the dominance of large-cap growth stocks like Amazon.com (AMZN), which inspired the “FANG” grouping. This concept widened to include other giants like Apple (AAPL) and Tesla (TSLA). Over time, dozens of smaller companies followed in their footsteps. The list includes service providers like Salesforce.com (CRM), e-commerce disruptors like Etsy (ETSY) and fintech pioneers like Block (SQ). Most of these companies had some kind of new technology merged with a scalable cloud-based business model. They traded at high multiples because of their growth potential — especially after coronavirus helped fuel demand for their services.

This year is just the opposite as investors pile into the commodity-related names like traditional energy, metals and fertilizers. Unlike the flashy tech names, these companies’ products date back decades — if not longer.

Other centuries-old businesses are outperforming. Utilities (thank you, Thomas Edison) are the only sector with a positive return in 2022 aside from oil and gas producers. Insurance companies, consumer staples and health care are also outperforming.

These industries aren’t just “non-tech.” They also lagged the broader market for years before the coronavirus pandemic, a sign they were ignored by big money managers. However their recent strength suggests they’ve been rediscovered. As investors reduce holdings of major growth names, are they shifting to groups that are less widely owned?

Activists and Value Investing Are Back

One of the biggest stories in recent weeks was Elon Musk’s decision to buy almost 10 percent of Twitter (TWTR). While the transaction drew a lot of attention, it’s one of several moves by investors taking large stakes in beaten-down companies and demanding changes to the business model.

Examples include Dollar Tree (DLTR), which raised prices to $1, Kohl’s (KSS), FedEx (FDX), Macy’s (M) and Centene (CNC). These “activists” like Dan Loeb and Paul Hilal usually demand changes in business models and buybacks. They can lift share prices for at least two reasons. First, they might have good ideas that improve the target company. Second, they (and other investors) may buy more shares if management follows their recommendations.

This trend is noteworthy because activists think that the market doesn’t see a company’s true potential. They think assets are worth more than is currently reflected in market prices. By definition, this is value investing — another practice that was largely ignored amid the recent trend of growth investing.

Safe Havens Are Breaking Out

Above we noted that many “old-fashioned” companies have outperformed in 2022. However not all pre-tech businesses are doing well. Some traditional corners of the market like industrials, financials and retailers are lagging.

Each of these groups have their own issues. Industrials and retailers supply-chain problems, while financials struggle with the flat yield curve. These sectors are also classic “cyclicals” that benefit from a stronger business cycle. Given the geopolitical worries and the Fed hiking interest rates, investors have shunned these economically sensitive names.

Instead, many of the outperforming stocks are “safe havens” like utilities and health care. Their businesses are less sensitive to slower economic growth.

In conclusion, the stock market may be undergoing a “regime change” after years of focusing on high-multiple growth stocks. The new environment is almost the polar-opposite of the previous, with “boring” and “old” sectors coming into favor. Similar transitions have happened at earlier times, like the switch from tech to housing after 2001. Keep reading Market Insights in coming months as we continue to cover how investors are adapting to a very different post-pandemic world.