A trader wearing a face mask works in the trading floor of the New York Stock Exchange (NYSE) as the Omicron variant of the coronavirus continues to spread in Manhattan, New York, the United States, on December 20, 2021.
Andrew Kelly | Reuters
The Nasdaq Composite and the tech sector of the S&P 500 fell sharply to start the year, but strategists say that may not be the fate of other groups or the broader market.
The tech-rich Nasdaq sold off strongly on Monday morning, falling about 10% from its all-time high at the height of the decline. Large-cap techs like Apple, Microsoft and Alphabet were all down sharply, but cut losses and helped the Nasdaq make a dramatic turnaround in positive territory towards the end of the day.
“I think it’s a violent and unpleasant revaluation, but I don’t think it will end up derailing the year,” said Lori Calvasina, head of US equity strategy at RBC. “I would say I’m still in the category of any kind of larger market downturn that would be in the range of 5% to 10% as opposed to 10-20%. 10-20% would be a growth scare, and I don’t think we’re in a growing pains. “
As technology fell, value stocks and cyclical sectors did better. For example, financials, helped by rising rates, were up 5% year-to-date, while S&P tech stocks were down 4.6%.
The Nasdaq ended Monday at 14,942.83, up 0.05% on the session. The S&P 500 closed at 4,670.29, down 0.1% on Monday. The general market index is down 2% for the year so far.
A revaluation of the Nasdaq
“For the Nasdaq, this is a valuation reset,” Calvasina said. “For the most part, this is a reaction to the monetary environment. It is not a growth scare. To really bring the market down in a meaningful and lasting way, investors really need to ask themselves if the economy risk a recession. “
The Nasdaq temporarily fell below its 200-day moving average on Monday, scaring investors. This level is the average of the last 200 session closings and is considered a key momentum threshold.
“I think a lot of this is technical,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “The Nasdaq hit its 200 days. It took a lot of people out and then hit a low. Buying low in those key moving averages has worked in the past.”
But Boockvar said the sale was not over. “We’re just getting started. The Fed is tightening up. Thinking that it’s going to end in six trading days of the new year is going to be moved,” he said.
The stock market has been rocked by a sharp rise in Treasury yields since the start of the year. In the last hour of trading of 2021, the 10-year Treasury was returning 1.51%. On Monday afternoon, that benchmark yield rose above 1.8%, but then fell back to 1.76%. Tech stocks rallied as yields declined.
Bond strategists expect the 10-year yield, which moves opposite of price, to continue heading towards 2%. will seriously harm the economy.
“They are [investors] cooking in a more aggressive Fed, but they still say the GDP is running at 3.9%. It is well above average. When the GDP trend is around or below the trend, you see growth increasing relative to value. Now that we have cyclical growth, you don’t have to buy secular growth, ”Calvasina said.
Technology and growth stocks, which are the most valued, are therefore disproportionately penalized by rising yields. Investors are willing to pay for the technology and the jumbo jets for the promise of future growth. When the Fed pulls out cheap money, these types of stocks seem more expensive.
“On tech companies, there’s nothing wrong with fundamentals, and their earnings revisions are strong relative to other sectors. I don’t think that’s the end of tech investing,” he said. declared Calvasina. The only thing wrong with these companies is their high valuations, she said.
Are the Fed’s concerns being exaggerated?
The Fed released a report last week from the December meeting which bolstered its focus on quickly cutting bond purchases and raising interest rates. The central bank also said it was looking to cut accommodation by reducing the size of its balance sheet by nearly $ 9 trillion.
“I kind of feel like the market is getting overkill, in terms of concern for the Fed,” said Sam Stovall, chief investment strategist at CFRA Research. “Is the Fed really going to cut completely by March, start raising interest rates in March, and start shrinking its balance sheet at the same time?” I think the Fed will make an adjustment and then keep their finger on the pulse to see how the economy reacts to that adjustment. “
Stovall said there are many reasons the market might not sell at all levels now. The Nasdaq could take further losses, but it does not expect the S&P 500 to initiate a correction. One of the reasons is that funds flow into pension plans at this time of year and many investors have cash ready to invest when prices fall.
“It’s the expensive stocks that are likely to be hit the hardest. Certainly on a relative basis, I think value will outperform growth, not just now but this year due to the uncertainty of interest rates at come, at least until the third trimester, ”he said. noted.
Stovall noted that the fourth quarter of 2022 and the first quarter of 2023 would historically be the best performing quarters of the four-year presidential cycle. Meanwhile, the second and third quarters have shown average declines since World War II, due to uncertainty surrounding the approaching midterm elections.
Trivariate Research founder Adam Parker said the return of the Nasdaq on Monday was encouraging.
“I see this as an opportunity to become more optimistic, and I am optimistic,” Parker said.
“I think there are individual titles that are going to go down a lot more because they’ve been overvalued, whether it’s home workplaces that don’t really have a tech movement or software companies. that are not going to generate any real profit for a long time, ”Parker said. “It’s a bit of a junior college to say that all of these things are worthless because the rates are going up. These companies that were partially turned over, you must like them more now.”