A perfect storm of catalysts hit growth stocks on Wednesday and produced some of the sharpest correction action since Sept. 28.
The primary problem was the highest inflation readings in nearly 30 years. Bonds initially tried to shrug off the CPI report, but a poor auction occurred later in the day, and the 20+ Year Treasury Bond Fund (TLT) fell sharply. A strong weekly employment report also contributed to some of the inflation concerns.
What also helped to tip the scales to the downside was the Rivian (RIVN) IPO. This much-anticipated offering of the electric vehicle maker was extremely frothy and sucked up much of the speculative energy in the market. As soon as it began to trade, it triggered broad selling in speculative names. Other EV names were dumped the moment that RIVN became active.
Some market pundits that are focused on the S&P 500 or DJIA are oblivious to what actually happened Wednesday. The senior indexes held up quite well as growth stocks were pounded. Only three of 50 stocks in the IBD 50 managed to avoid the carnage, and growth ETFs such as ARK Innovation ETF (ARKK) took a hit of close to 4% before bouncing.
Growth stocks tend to be much more sensitive to interest rate and inflation issues because their valuations are primarily a function of earnings far into the future. When rates go up, that impacts the present value of the future income stream. A stock like Tesla (TSLA) won't have significant earnings for many years from now, and the discounted value of those profits is highly sensitive to interest rates and inflation.
The good news is that the market is not fully embracing the inflation concerns. There already is a bounce in both bonds and growth stocks, and early indications Thursday are higher. Everyone was very aware of how technically extended certain areas of the market were, so it is healthy to have that pressure relieved to some degree.
The big issue now is how well stocks will do at finding support and bouncing back. Dip buyers did show up late in the day on Wednesday as some panic appeared, but it was a brutal day for growth stocks and some speculative names, and there are likely to be folks looking for an escape into strength.
Market participants are still focused on stock picking, but they were hurt as some good earnings reports were sold hard. That will create opportunities for active traders, but this is a volatile environment right now, and a little extra care will be needed.
We have better action in the early going Thursday as inflation worries seem to have diminished.
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