At MM we believe 2022 will be characterized by increased volatility and stock / sector rotation as investors weigh the next twist in the tale for bond yields and if we’re right it won’t all be one-way traffic. The last 6-months has already seen noticeable rotation between stocks and sectors e.g. in the US the major S&P500 has been dragged ever high by the heavyweights like Apple (AAPL US) whereas the smaller cap end of town (Russell 2000) may have peaked in November and it’s already lost the gains of the last year, we believe there are a couple of important points here:
- If the S&P500 were to mirror the correction by the smaller cap names it would need to correct 20% i.e. remain open-minded to what 2022 can deliver.
- If the small end of town can underperform so noticeably it can also reverse such moves, especially if everyone is overweight the larger FANG stocks.
We will be watching especially carefully through the coming years for stocks that endure periods of underperformance because they might just be presenting excellent risk / reward opportunities whichever direction the market takes.