It could get hairy this year as the Federal Reserve is poised to lift interest rates from rock bottom levels.
I think we're going to experience more volatility in 2022 than what we have seen over the last year, but I think we're going to experience more volatility over the last decade. In 2021 we started to see volatility creep up, and I think we will see volatility creep up even further in 2022, said Pimco portfolio manager Erin Browne on Yahoo Finance Live.
Historically, stocks have had a mixed track record due to rate hikes out of the Fed.
The S&P 500 has dropped 6% on average during the three months since the first rate increase of recent cycles, according to new research from Goldman Sachs chief U.S. equity strategist David Kostin. Weakness in stocks has been short-lived but gains have been far less juicier than investors now have come to expect.
Kostin notes that the S&P 500 returned 5% in the six months since the first rate hike in a cycle.
As we reach these transition points in the market - and the big transition is going to be the Fed starting to hike rates - that typically means you are going to have bigger corrections, Browne explained. I think we will have bigger corrections along the way. Browne is a big fan of semiconductors as the industry continues to flourish financially due to the pandemic-fueled chip shortage.
The markets are already beginning to act funky - especially in sectors where valuations are lofty see tech stocks The Nasdaq Composite finished Tuesday with a drop of 2.6%, bringing it to its lowest level since October. On Wednesday, the Nasdaq hit correction territory, marked as a 10% decline from a recent high.
According to Yahoo Finance Plus data, all five components of the FAANG complex Facebook Meta, Apple, Apple, Amazon, Netflix and Google have shed more than 4% year-to-date. The FAANG sector lost 14% of its revenue on Wednesday evening, leading to a 14% drop in Netflix.
The market does not move in a straight line. Given the important change in Fed policy that has begun to be implemented and the fact that the stock market is extremely expensive, we believe a deep correction in the stock market is going to occur over the next few weeks and months. Matt Maley, Miller Tabak chief markets strategist, warned that there is little question that there is no doubt that there will be many short-term relief rallies along the way.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter, BrianSozzi, and LinkedIn.