Higher interest rates are triggered by some very aggressive and dramatic rotational action today. The easiest way to see it is to compare the DJIA, which is up about 0.67%, to the Nasdaq 100 (QQQ) , which is down about 1.7%.
The DJIA is heavily weighted toward financial and value stocks like Caterpillar (CAT) , JP Morgan (JPM) , Goldman Sachs (GS) , and American Express (AXP) . The Nasdaq 100 is heavily weighted toward growth stocks and China names like Zoom (ZM) , DocuSign (DOCU) , Pinduoduo (PDD) , and Advanced Micro (AMD) .
In a rising interest rate environment growth stocks are less valuable because they will produce bigger earnings far into the future. Those earnings have to be discounted to present value, and the higher interest rates are then greater than the discount.
What is happening right now is that there are huge baskets of stocks being bought and sold in order to shift exposure out of growth and other stocks that are hurt by higher rates. A good example of a stock that is benefiting from this rotation today is Berkshire Hathaway (BRK.B) which has heavy exposure to value names like Coca-Cola (KO) and financial names like insurance.
When this rotation action occurs, it doesn't distinguish between the merits of individual stocks. If it is growing, it is sold, and if it's value, it is bought. This causes some major frustration for market participants that see their carefully chosen stock jerked around for reasons that have nothing to do with its fundamental prospects.
The good news is that this sort of rotational action tends to occur abruptly and ends quickly. After things calm down, there will be some opportunities for stock pickers to accumulate those names that have been unfairly punished by the rotational algorithms. Unfortunately, this rotational action can occur in waves, so it is easy to be caught by surprise when another one hits.
Days like this can be quite discouraging for stock pickers that were hopeful that the end of tax selling would relieve some pressure, but I suspect we will see some reversals occur fairly fast.
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