Between February 16 and March 4, the S&P 500
Why Did the Market Selloff?
The most likely catalyst for the drop in this part of the market was that interest rates were rising in anticipation of increased fiscal stimulus and rising optimism around the economy reopening as case counts have dropped and vaccination is continuing at more than 2 million per day.
Growth stocks tend to underperform in environments with accelerating economic growth and rising rates. In contrast, this is great for value and cyclical stocks which have outperformed over this timeframe. Another reason is simply that these stocks have had exceptional performance over the past year, so there is some selling for tax reasons.
Another factor is that many of these stocks were momentum trades that didn't have significant earnings to justify their valuations, so when the price stopped going up, momentum traders started selling, and there were no value buyers to step in and support the stock. Contrast this to stocks like Facebook
Diagnosing the Market Selloff
Market sell-offs come in multiple forms. Sometimes, they can be the prelude to deeper corrections or even bear markets especially when underlying, economic conditions are deteriorating. However, they tend to be short-lived during bull markets when economic conditions are improving.
In these environments, these types of sell-offs can be healthy and allow for bull markets to continue climbing. It lets overbought or overbullish sectors to cool off and helps set up the next batch of leadership to emerge. The current selloff falls under this category as most market components did not participate in the selloff. In fact, sectors like energy and financials continue to trend higher.
At this juncture, the balance of evidence points to this being more of a market rotation rather than a correction. The S&P 500 is up more than 5% from Thursday's low and in pre-market trading looked ready to make new highs. However, while tech stocks are also participating in the bounce, it's possible that they will continue to underperform unless interest rates start moving lower.