What does the chart show?
After a volatile start to the year, US equity benchmarks, the S&P 500 and NASDAQ, have ended the month trading well below their highs of the beginning of the month and mid-November respectively. The S&P 500 ended the month down -5.2% and the NASDAQ down -9.0% in local terms. The chart shows the net monthly fund flows of the Invesco QQQ Trust since 1999, one of the most actively traded exchange-traded funds (ETFs) in the world. The fund only invests in non-financial stocks listed on the NASDAQ, which has naturally seen higher weightings to large tech names. It ultimately is trying to track the performance of the NASDAQ 100 Index. In January 2022, the monthly outflows reached levels not seen since the 2000s, reflective of the changing investor sentiment after weeks of turmoil in US large cap companies. $6.2bn was exited during January with the majority of the outflows taking place towards the end of the month, suggesting that investors have been taking profits after a number of very strong years for US equity markets in addition to concerns over inflation and interest rate rises.
Why is this important?
US large cap stocks have suffered a volatile start to 2022, largely attributed to the Fed signalling tighter monetary policy this year in order to combat the highest inflation levels seen in decades. Expectations of rising interest rates have driven investors to reassess the valuations of large cap growth stocks as these are generally more sensitive to interest rate movements. With such a significant shift in the monetary policy landscape coming into view, we expect the best returns are now likely to come from a very different cohort of stocks than those that have led returns over the past decade. We continue to see a lot of opportunities in value stocks, which have generally proved resilient during the sell-off in January. As well as maintaining broad diversification, we believe it is more important than ever to include a significant allocation to value stocks in portfolios, across a broad range of industries and geographies.