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Maybe stock market investors are so conditioned to gains over the past year that it seems funny to even be mentioning potential pitfalls after a month when global stock averages rose another 2.5%. But there clearly was a ‘wake-up call’ in the last two weeks of February when ten-year bond yields in the U.S. surged briefly above 1.5%, causing pullbacks in many of the high growth winners of the past year of between 10-15%. While no one knows if there is a key ‘breaking point’ in terms of when stocks would succumb to rising rates like they did in 2018, but this past week shows that stocks (down ~2%) cannot absorb a surge in bond yields, especially when the growth pocket of the market is priced for perfection. Hardest hit in this brief sell-off were the leaders of the past year, those growth stocks that may not have any real earnings but lots of potential, which gets rewarded so much more when long-term interest rates are at record lows. As evidence, the red-hot exchange-traded funds from ARK Invest, which had five funds in those core growth areas which had risen over 100% in the past year, suffered a major setback. In its worst week since last March, the firm’s flagship product, the $24 billion ARK Innovation exchange-traded fund tumbled 14.6%, as some of its top holdings, including Tesla and Roku, fell sharply and investors pulled substantial money out of the funds.
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