Market signal strength has moved from the fastest growing and most speculative areas to more defensive ones, suggesting that the rate of change for economic growth and inflation will likely slow in 2022.

Market signal strength trends tend to move away from cyclical/speculative factors and towards higher quality/defensive factors as the economic cycle slows.  Our view continues to be that the rate of change for economic growth and inflation will likely slow in 2022, leading to a continued strengthening in market signals for defensive areas. 

Some of the first equities to lose signal strength were the best performing companies in 2020.  Some of this weakness was driven by their business improving during the lack of mobility in 2020 followed by a low probability of being able to repeat that growth in future years.

Source: Koyfin.

Some of the next areas to experience weakness were companies with limited near-term fundamentals but a high amount of potential future opportunities (using ARKK ETFs as a proxy). 

Source: Koyfin.

Around the same time, newly public companies, especially those formed via Special Purpose Acquisition Companies (SPAC), peaked and have been underperforming since early 2021. 

Source: Koyfin.

In November, small cap companies, crypto related equities, and coins peaked and have been underperforming since.

Source: Koyfin.

Larger-sized technology related companies have also been underperforming since November and continued that trend to start 2022. 

Source: Koyfin.

Since the peak in Tech and small caps, defensive and lower volatility factors have been outperforming.

Source: Koyfin.

If these market signals continue in 2022, this will add to the evidence that investor expectations for the rate of change in economic growth and inflation will likely decelerate during the coming year.   

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.