It’s certainly been a weird 14 months for investors. We entered last March with a looming pandemic casting a shadow over the market's short-term future, ultimately leading to some impending panic that quickly rebounded in a vivacious manner.
For the rest of the year, we saw continuous highs throughout the remaining months before reaching a market euphoria of sorts in Q4 of 2020. Thousands of new investors piled into the markets, the gains were abundant, and stocks that perhaps shouldn’t even be publicly traded companies went to the moon.
A reality check
This trend continued until February 2021 when it hit a wall composed of short-sellers, bearish analysts, and hedge funds. Since then, new investors have faced a harsh reality check and may have actually fractured the market in the process.
But what exactly do we mean when we say fractured? The market is divided, it’s idiosyncratic, it’s...split, broken.
The proof is in the numbers
In the immediate last 3 months through yesterday's close, the DJIA gained nearly 7% and the S&P 500 over 3%. The Nasdaq though? It's lost about 8%. And the Russell 2000, the US small-cap stock market index, is also down nearly 7%.
If we compare this to the prior 3 months, the Russell 2000 gained about 30% while the Nasdaq added about 16%. During that same time, the Dow Jones also added a solid 10%—a respectable return for a 3-month period considering the large average market cap of its underlying companies. The S&P also added about 13%, another big move.
A correction and a divergence
Basically, the entire market, including small-cap companies, were moving in unison until they weren't by February 2021.
It’s undeniable that the growth sector was due for a correction after the show it put on in late 2020, early 2021. A 30% return for an entire index within a few months is abnormal and obviously, not sustainable.
Now though, the waters are choppy. And the more speculative, growth-oriented sectors of the market have trended negative, halted by short-sellers and skepticism, while the Dow Jones and S&P 500 continue to churn right through the gains.