Quarterly Update: DECEMBER 2021
The gradual signs of a slowdown within equity markets last quarter appeared to follow through to the December quarter for all major markets except for the United States.
In saying that, Europe and Australia still ended positive on the quarter (4.3% and 3.6%, respectively). Compared to the United States’ 9.2% gain, there was clear divergence. This divergence occurred in November off the back of overly conservative earnings expectations getting beaten to end the year, especially in mega cap stocks such as Alphabet (Google), Apple and Microsoft.
Australia and Europe traded nearly in-line with each other and whilst ending up on the quarter, the two equity indexes traded sidewards from November based on the absence of such mega cap tech stock beating expectations. This portrays the significant difference in sector composition of the US compared to Australia and Europe (much higher technology weighting in US).
A comparison of the Russell 2000 (Smallest 2000 companies in the US), the NASDAQ (Technology) and Dow Jones (Industrial overweights) highlights the uneven distribution of returns helping the strong quarterly gain.
After sharp rises in these US indexes through October, November saw volatility return to the market as significant moves in short-term bond yields suggested possible slower than expected growth in the medium-term.
This impacts more economically-sensitive stocks such as small caps (Russell 2000), whilst the well-known non-economically sensitive technology stocks (NASDAQ) were not as impacted. The divergence between these two markets was a significant ~10% to end the quarter as noted by the above chart.
Even though the NASDAQ ended up 10% on the quarter, only 31% of the stocks in the NASDAQ were trading above their 200-day moving average. This means that the performance of the index is only coming from a select few stocks and shows possible weakness.