Retail favorites see red, but is there more pain ahead?

The Fed’s hawkish tone may have set in motion a sell-off in the market, but retailers were not expecting the carnage being witnessed in their favorite stocks. Minutes from the Fed’s December FOMC meeting were released on Wednesday suggesting that the central bank was taking a more aggressive policy to curb rising inflation. The Federal Reserve indicated that it might lift short-term interest rates as soon as March.

The monetary policy decision, though not unexpected sent the market into a roil. While a broad section of US equities, were down for the day, stocks that have been top of the shopping list for retail investors plummeted.

Shares of Robinhood (HOOD:NASDAQ) are slipped by 2.5% on Thursday continuing the downward slide which has characterized the stock’s price movement. The stock is down 15% this year and has fallen 50% below its IPO price. The company’s dependence on revenue from crypto trading is dealing a severe blow to how the stock is perceived in the market given the continual decline in cryptocurrencies such as Bitcoin and Ethereum which have fallen 30% from their November peaks Robinhood is down 84% from its August intraday highs when the stock peaked.

Cathie Wood’s ARK Innovation ETF (ARKK:NYSE) is also experiencing a bloodbath as more investors are finding the exit door. Cathie wood who became a favorite of retail traders in 2020 because of her bullish thesis on Tesla (TSLA:NASDAQ), seems to have lost reckoning among investors.

The fund finished 0.63% lower on Thursday closing at $85.58. The stock touched a 52-week low earlier in the week (Tuesday), its lowest since Sept. of 2020. The ETF is already down more than 10% in 2022, and 45% off its peak. Of the 43 holdings in ARK Innovation, 36 are more than 40% off their 52-week highs.

Meme stocks such as GameStop Corporation (GME:NYSE) and AMC Entertainment (AMC:NYSE) have also not escaped the rout. Both stocks gained notoriety for being the star picking of the short squeeze initiated by a band of retail traders on WallStreetBets, a group on social media platform Redditt.

GameStop finished 1.28% higher on Thursday but spiked over 25% in after-hours trading after the Wall Street Journal reported that the retailer plans to create a marketplace for non-fungible tokens (NFTs) and establish cryptocurrency partnerships to create games and items for the marketplace. However, the stock is down 13% year-to-date, and down 46% from its November highs. AMC Entertainment, on the other hand, has lost 15% so far this year and is about 50% off its November highs. The stock lost 1.27%on Thursday.

Peloton (PTON:NASDAQ) perhaps exemplifies the rout among retail favorites. The stock is down 80% in the past year. Poor sales forecast due to the reopening of outdoor gyms, lead to a slurry of downgrades from analysts who have long maintained the notion that it was a stay-at-home stock.

Even Tesla has not been spared from the market sell-off. The stock had gained momentum earlier in the year following its trashed delivery forecast. The stock is down 11% so far this year but managed to close 5% higher on Thursday.

It is no news that the downward trend among retail favorite stocks began last November when the Fed Chairman, Jerome Powell decided to retire the word ‘transitory” from its description of inflation. That sent a signal to the market that the central bank was becoming more hawkish. However, given the recent sell-off in these names, it appears that retail traders should brace for more pain ahead.

The S&P 500 has typically retreated by 5% in the event of interest rate hikes from the Fed. So far this year, the S&P 500 is only 2% from its highs. With the treasury yields spiking, unprofitable companies which have had lofty runs in the last two years are beginning to get skinned and screened out of portfolios. The 10-year Treasury yield rose as high as 1.75% on Thursday, while the 2-year yield jumped to its highest level in 2 years.

The current sell-off is likely to persist as there is still a lot of profit to be taken off markets from most of these names which are currently trading well above their valuations. Considering the fact that the Fed may raise interest rates at least three times this year, a very dark night may just be getting started for holders of these stocks.

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