The “Great Rotation” Out of Growth and Tech Has Finally Come

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In early December, I expressed concerns about the potential for major losses for investors.

Specifically, I was worried about growth stocks trading at absurdly high valuations.

My concern was based on striking valuation data, like the spike in the chart below.

Total Market Cap of Stocks With a Price-to-Sales Ratio of More Than 20X

That’s not a subtle sign of stock market euphoria.

An incredible $4.5 trillion worth of stocks were then trading at more than 20 times sales – even more than the $3.6 trillion worth of stocks that traded for more than 20 times sales at the peak of the dot-com bubble in early 2000.

I’d never seen a period in which valuations were this rich.

Given this data, investors with major exposure to growth stocks were clearly going to regret it.

What surprised me was that these expensive stocks went into free fall so quickly.

But that’s exactly what’s happening now.

In a period of just weeks, growth stocks have entered a full-fledged bear market!

A bear market is defined as a decline greater than 20%…

The Bear Has Arrived for Growth Stocks

As I write this, the iShares Russell 2000 Growth ETF (NYSE: IWO) has now dropped by more than 25%.

It has been a breathtaking collapse. It signals that growth stocks are in a bear market.

This is the risk that you take when you own stocks priced beyond perfection.

When the wind comes out of the market, these stocks plummet.

It was a January to forget for many stocks.

The tech-heavy, growth-focused Nasdaq closed out January down 9% year to date.

The worst previous January decline on record was the 9.89% drop in 2008 when the housing bubble popped.

Again, the sell-off of the tech sector isn’t a surprise to us here at Wealthy Retirement.

I’ve been calling for a “Great Rotation” out of the technology sector, and I’ve been attributing the catalyst to the reality of rising interest rates hitting investors.

Apparently, reality arrived in January 2022.

Meanwhile, outside of growth stocks, an area of the market representing great value since November 2020 has continued to outperform…

The energy sector has nearly tripled the strong performance of the S&P 500 since November 2020.

And since the market sell-off in January 2022, the energy sector’s outperformance has widened even further.

The Energy Sector Continues to Dominate

The Energy Select Sector SPDR Fund (NYSE: XLE) is now up a stunning 126% since the start of November 2020.

That’s an incredible run for an entire index of stocks.

Also holding up well are two other areas that can protect our wealth as rates start to rise.

Those two areas are insurance and bank stocks, both of which are up so far this year while the market has struggled.

Our Insurance and Banking Picks' Total Returns Have Outperformed

I hope you have benefited from having some exposure to these areas in your portfolio.

January 2022 showed us the importance of diversification.

Now, the big question is this: Where do we go from here?

Did January’s volatility set the course for a difficult 2022?

I don’t know. But what I do know is that I welcome whatever comes at us.

After spending three decades in the market, I don’t stress over stock market declines – I love them.

This is when the biggest investing fat pitches get delivered and when we can take on minimal risk by buying great companies.

What I’d really like to see is a continuation of the sell-off in technology stocks. That could give us the opportunity to buy some great companies at bargain-basement prices.

I’m not calling for that, but I’d certainly appreciate it.

It’s been a fascinating start to the new year, and I can’t wait to see what comes next. Ready yourself for some incredible pitches…

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