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Small caps and growth stocks are out and utilities and energy stocks are back in following a surprise inflation reading that has sent U.S. equity markets plunging on Tuesday.
Such was the turmoil, that the CBOE VIX Volatility Index, the so-called Wall Street fear gauge, spiked from around 13.9 to 17.9 — a 28% jump — hitting its highest level since Nov. 1. It ended the day at 15.85.
“At present, this increase is the biggest jump since March 9th and the volatility index stands at over a three-month high. And yet, these are still very low levels of overall implied volatility,” said analyst John Kicklighter on X.
The ProShares Vix Mid-Term Futures ETF (NYSE:VIXM), an exchange traded fund which aims to track the VIX Index, jumped 2.2% to $16.37 on Tuesday, but was down 1.6% in pre-market trading on Wednesday.
Also Read: Market Correction Due: Stocks Are Running Out Of Reasons To Move Higher, Analyst Says
The S&P 500 Index ended 1.4% lower at 4,953.17 on Tuesday. Tracking the index was exchange traded fund SPDR S&P 500 ETF (NYSE:SPY) which also lost 1.4% to $494.14.
ETFs tracking growth stocks and small-cap indexes experienced more significant declines. The Invesco QQQ Trust, tracked the NASDAQ’s 1.8% fall, while the iShares Russell 2000 ETF (IWM), which tracks the small cap index, slumped 4.1%.
“Markets had embraced the narrative of a very soft landing that allowed for sizeable early rate cuts by the Federal Reserve,” said Mohamed El-Erian, Allianz chief economic advisor on X.
He added: “The data release serves as a reminder of the challenges of the last mile in the inflation battle and the insensitivity of certain sectors of the economy, such as services, to higher interest rates.”
Indeed, on Tuesday, Craig Johnson, chief analyst at Piper Sandler, told Benzinga’s PreMarket Prep that he expected June or July for the timing of the Fed’s first rate cut, as he predicted a market correction.
“Be ready for a correction in this market that could probably take the S&P 500 back to about 4,600,” Johnson said.
The conventional wisdom during times of high inflation and interest rates is to rotate out of small caps and growth stocks — the sectors that rely on costly funding to keep going — and into value stocks that pay dividends, such as utilities and energy companies.
The Utilities Select Sector SPDR Fund (NYSE:XLU) was down with the rest of the market on Tuesday, but could bounce if the equity sell-off persists. Likewise, the Energy Select Sector SPDR Fund (NYSE:XLE), which holds top oil company stocks Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), was also lower on Tuesday.
Some analysts continue to like the aerospace and defense sectors given the prospect of two lingering wars in Ukraine and Gaza, and the possibility of further escalation in the Middle East.
Companies such as Transdigm Group (NYSE:TDG) and Howmet Aerospace (NYSE:HWM) have been good long-term investments in these sectors, as the iShares US Aerospace & Defense ETF (NYSE:ITA) has gained around 22% since the equity rally began in October.
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