Value stocks, FINERGY, and the 10-year Treasury are giving us clues for 2022.

The US stock market got off to a rough start for 2022 last week with the S&P 500 down nearly 2%. Investors sold off their Growth and Technology stocks, but they loaded up on Financials and Energy stocks which were actually up big last week.

The job market is strengthening. Wages are increasing at the highest rates in decades. Inflation is rising and near a 40-year high. The Fed is behind the curve when it comes to interest rate policy. Bond yields were up last week signaling higher rates are coming. Some analysts see the Fed begin hiking as early as March. Goldman Sachs is forecasting 4 Fed rate hikes this year (more than the 3 that many other economists are expecting).

In short, there is a shift from what we’ve seen the past 20 months in regards to what’s working and what’s not working. Could this lead to higher stock market volatility in 2022? In 2021 we never saw a pullback greater than 5% for the S&P 500. There is a good chance we see a correction (10% pullback) in the first half of the year if the Fed fumbles the ball in the red-zone.

I see this week as an important indicator of where things are headed. Here are the 3 things I’m watching this week as the story unfolds:

#1 – The Growth vs Value Trade

Through last Friday:

  • The S&P 500 Growth ETF (IVW) was down -4.47% YTD.
  • The S&P 500 Value ETF (IVE) was up +1.14% YTD.

Value stocks are already outperforming growth stocks by more than 5% this year after just one week of trading.

Growth has outperformed value in a big way since 2007. If we are seeing a true rotation into value, then there is a long way to go for this trade to unwind (and a lot of opportunity for stock pickers along the way)!

#2 – The “Finergy” Trade

Investors have poured money into Financial stocks (XLF) and Energy stocks (XLE) in recent days. The charts for these sectors are breaking out while the rest of the market is treading water. Higher interest rates bode well for Financial stocks. Energy stocks have been in favor for awhile now thanks to supply shortages and a rise in demand for fossil fuels as the economy recovers. I’m keeping an eye on the “Finergy” trade to see if it has sustainability.

Also notable is that Finergy has some of the most attractive valuations in the market relative to other sectors.

#3 – The 10-Year Treasury Yield

The yield on the 10-year US Treasury has done nothing but go up since the beginning of the year. In fact the 10-year is now at a new post-COVID high as it yields above 1.75% this morning. All it needs to do is trade above 1.85% and it will be above pre-COVID levels.

Long-term, stick to your strategy. In a diversified portfolio you will always have something you LOVE and something you HATE. Those positions will vary over time.

Long-term investors shouldn’t get too excited about all the noise.

The reality is that if you have a diversified portfolio it should include all of the asset classes mentioned above (Tech, Finanicals, Energy, Value, and Growth). If your portfolio is diversified correctly you should always have something you hate and something you love in your portfolio. Stay focused on the long-term.