On Tuesday, February 21st, the major US stock indices experienced their worst day of 2023, with the Nasdaq closing down over 6% from its high in early February. This drop is due to a recent surge in US Treasury rates, which have reached five-month highs as a result of the Federal Reserve’s hawkishness. As interest rates continue to rise, US equities, particularly tech stocks, are weakening. This has happened several times since the stock market peaked over a year ago. However, the difference in 2023 is that growth stocks, including tech stocks, have been leading the market. The chart shows that many of the worst-performing stocks from 2022 are this year’s winners. Tesla, Nvidia, and Meta Platforms are up by 60%, 40%, and 40%, respectively. Despite the market volatility, many investors are still optimistic about the future of the stock market. Technical traders point to charts of global indices and large US sectors breaking out to new highs, while macro investors warn of a potential hard landing. As the dust settles on Wednesday’s rout, investors are advised to tread carefully and focus on quality companies, even if those companies fall into growth categories.
Some analysts have raised concerns about the sustainability of the current market rally. According to Callie Cox, a US investment analyst at eToro USA, low-quality stocks with bad balance sheets and cash flow are unlikely to lead meaningfully again, even if the major indices resume their rallies. She also notes that 44 out of the 50 best-performing stocks in the Russell 3000, a broad measure of small, mid, and large-cap US stocks, did not generate any profits over the past 12 months, which is unusual considering that higher bond yields should entice investors to focus on profits and cash flows.
The recent surge in interest rates has led to concerns about inflation, which could cause the Federal Reserve to raise interest rates sooner than expected. This would increase the cost of borrowing and could slow down economic growth. Some experts believe that the Federal Reserve may have to take action to address inflationary pressures, which could lead to a market correction.
Despite the potential risks, some investors remain bullish on the stock market. They argue that the current market rally is being driven by strong corporate rowing economy. Additionally, some technical analysts point to charts of global indices and large US sectors breaking out to new highs, indicating that the current rally may have further room to run.
However, it’s important to remember that the market is unpredictable, and unforeseen events can quickly change the direction of the markets. The current environment is particularly volatile, and there are many factors that could lead to a market downturn, including inflation, interest rates, and geopolitical tensions. Investors should consider taking a cautious approach and diversifying their portfolios to protect against potential risks.
In conclusion, the recent market volatility has raised concerns about the sustainability of the current rally, particularly in the tech sector. While some investors remain bullish on the market, others are urging caution, noting that low-quality stocks with bad balance sheets and cash flow are unlikely to lead meaningfully again. Additionally, the recent surge in interest rates has led to concerns about inflation, which could cause the Federal Reserve to raise interest rates and slow down economic growth. As always, investors should consider taking a diversified approach to protect against potential risks and market downturns.