The sector and style rotation we started seeing towards the end of 2021 picked up steam in the first two weeks of January. In our 2022 outlook article for Seeking Alpha we wrote the following on Dec 31, 2021,
“We are coming off two amazing stimulus fueled years where the S&P 500 and Nasdaq generated gains of 46% and 74%, respectively (at the time of writing) since the start of 2020. This is despite a recent pullback in growth stocks. Looking in from the outside and through the lens of a market participant in early 2020, this kind of performance during a global pandemic with multiple waves of infection is beyond comprehension. In other words, markets for the most part remain unpredictable. There’s one rule however that has managed to withstand the test of time and that is: “Don’t fight the Fed.” When the Fed decides to open or close the flood gates, it is better to go with the flow instead of fighting the strong current.
With both the government and market participants agreeing that inflation is not transitory, we’re likely to see Fed tightening and this could result in a “don’t fight the Fed” scenario, but in reverse. The key driver of the stock market is likely to be Fed action and sector/style rotation as a result of anticipated higher interest rates.