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A trader works on the floor of the New York Stock Exchange in New York City on Dec. 9, 2021.BRENDAN MCDERMID/Reuters

Scores of high-flying stocks that benefited from one of the frothiest markets in decades are crashing, concluding a pandemic round trip that saw share prices soar, then collapse, in under 24 months.

Early this year, retail investors poured money into the stock market, and at one point accounted for half of all trades in Canada. By July, a basket of stocks tracked by Goldman Sachs, known as the Retail Favourites index, had nearly doubled in value since the start of 2021.

But only five months later, the basket’s value has crashed, and as of mid-December, its year-to-date return has fallen below that of the S&P 500 – which is up 27 per cent since the start of the year.

The correction has humbled many CEOs, whose companies looked like stellar investments not so long ago. After the pandemic erupted in March, 2020, shares of Zoom Video Communications Inc., for instance, went on a tear, and by February of this year its stock price had more than quadrupled. But because of the recent sell-off the shares are now down 58 per cent from their high this year.

High-profile fund managers have also been humbled, including Cathie Wood, who morphed into a money management rock star during the pandemic because of phenomenal returns in her Ark Innovation ETF. Yet this year the fund is down 23 per cent – with a particularly sharp sell-off in the past six weeks. In all, Ms. Wood’s flagship fund has underperformed the S&P 500 by 50 percentage points year to date.

What’s behind the recent growth stock crash? Inflation fears, for one. Central banks are starting to acknowledge that the recent rise in consumer prices may not be transitory, and that is raising investor expectations of rate hikes next year. Growth stocks often struggle when rates rise.

But George Pearkes, a macro strategist at Bespoke Investment Group, is adamant there is more to it. “These names have just run out of incremental buyers.”

“We’ve had a huge uptick in demand for these kinds of investments over the last several years,” he said in an interview. It’s hard to pinpoint when the inflows will run dry, he said, but when they do, animal spirits can kick in and investors look to cash in profits.

The hard part is determining which companies or indexes will be affected, because the term “growth stock” has taken on a broad meaning. Some baskets, such as the iShares Core S&P U.S. Growth ETF, are still up 32 per cent for the year.

The trick is digging into the portfolio‘s composition. The iShares ETF, for instance, tracks “large- and mid-capitalization U.S. equities that exhibit growth characteristics,“ which means it includes the likes of Home Depot Inc. and UnitedHealth Group Inc.

Meanwhile the stocks that went on a tear during the pandemic were often unprofitable companies that were expected to benefit as more people worked from home, or conducted more of their daily lives on software platforms. Examples include Peloton Interactive Inc. (down 74 per cent since January) and Spotify Technology SA (down 28 per cent over the same period).

In Canada, examples include Lightspeed Commerce Inc., which is now down 36 per cent year to date, and Montreal-based payments company Nuvei Corp., which is down 8 per cent over the calendar year – and down 53 per cent in the past month. Both companies have been targeted by a short-seller.

Stock selection, then, has hurt the Ark Innovation ETF. While mega tech companies such as Apple Inc. and Microsoft Corp. have continued to perform well, Ms. Wood decided to focus on the more traditional meaning of growth stocks – that is, up and coming companies.

Some of these bets have held up, such as investments in Tesla Inc. and Shopify Inc. But U.K.-based PensionCraft, a consultancy, crunched the numbers and as of last week found that roughly half of the fund’s holdings had dropped at least 50 per cent from their 2021 peak levels.

The recent crash hurts retail investors who chased returns over the past year. Ark is famous for its 41.3 per cent average annual return over the past five years, but “most of the returns came when fewer shareholders were around to benefit,” Morningstar strategist Amy Arnott wrote this week.

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