A trader in a face mask works on the trading floor at the New York Stock Exchange (NYSE) as the Omicron coronavirus variant continues to spread in Manhattan, New York City, U.S., December 20, 2021.
Andrew Kelly | Reuters
The Nasdaq Composite and the tech sector of the S&P 500 slid sharply to begin the year, but strategists say that may not be the fate of other groups or the broader market.
The tech-heavy Nasdaq sold off hard early Monday, falling roughly 10% from its all-time high during the worst of the decline. Big cap tech, like Apple, Microsoft and Alphabet were all sharply lower but curtailed their losses and helped the Nasdaq stage a dramatic reversal into positive territory near the end of the day.
“I think it’s violent and unpleasant repricing, but I don’t think it will end up derailing the year,” said Lori Calvasina, head of U.S. equity strategist at RBC. “I would say I’m still within the category of any kind of broader market downturn would be in the 5% to 10% range, as opposed to 10% to 20%. 10% to 20% would be a growth scare, and I don’t think we’re in a growth scare.”
As tech has fallen, value stocks and cyclical sectors have done better. For instance, financial stocks, helped by rising rates, were up 5% since the start of the year, 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 ended at 4,670.29, off 0.1% Monday. The broad-market index is down 2% for the year so far.
A valuation reset for the Nasdaq
“For Nasdaq, it’s a valuation reset,” said Calvasina. “For the most part, this is a reaction to the monetary backdrop .This is not a growth scare. To really knock the market down in a significant and lasting way, you need to really have investors question whether the economy is risking recession.”
“I think a lot of this is technical,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “The Nasdaq got to its 200-day. That flushed a lot of people out, and then it bottomed. Buying on the dip at these key moving averages has worked in the past.”
But Boockvar said the sell-off is not over. “We’re just beginning. The Fed is tightening. To think it’s going to end in six trading days of the new year is going to be misplaced,” he said.
The stock market has been rattled by a sharp jump in Treasury yields since the beginning of the year. In the final hour of 2021 trading, the 10-year Treasury was yielding 1.51%. On Monday afternoon, this benchmark yield topped 1.8%, but then slipped back to 1.76%. Tech stocks recovered as yields dropped.
Bond strategists expect the 10-year yield, which moves opposite price, to keep heading toward 2% They say the move is based on expectations for Federal Reserve to hike interest rates, they also say it’s because the Covid omicron variant does not seem like it will severely harm the economy.
“They’re [investors] baking in a more aggressive Fed, but they’re still saying GDP is running at 3.9%. That’s way above average. When GDP trends down to about or below trend, you see growth up versus value. Now we have cyclical growth, you don’t have to buy secular growth,” Calvasina said.
Tech and growth stocks, which are most highly valued, are therefore disproportionately hurt by higher yields. Investors are willing to pay up for tech and high-fliers for the promise of future growth. When the Fed takes away cheap money, those types of stocks look more expensive.
“On tech companies, there’s nothing wrong with the fundamentals, and their earnings revisions are strong versus other sectors. I don’t think this is the end of tech investing,” Calvasina said. The only thing that’s wrong with these companies is their lofty valuations, she said.
Fed worries overblown?
The Fed last week issued minutes from December meeting that reinforced its goal of reducing its bond purchases quickly and raising interest rates. The central bank also said it was looking to reduce accommodation by reducing the size of its nearly $9 trillion balance sheet.
“I’m sort of feeling the market is getting overblown, in terms of its worry about the Fed,” said Sam Stovall, chief investment strategist at CFRA Research. “Is the Fed really going to taper entirely by March, start to raise interest rates in March and then start to reduce its balance sheet at the same time? I think the Fed is going to make an adjustment, then keeps its finger on the pulse to see how the economy reacts to that adjustment.”
Stovall said there are plenty of reasons why the market may not sell off across the board now. The Nasdaq could see further losses, but he does not expect the S&P 500 to go into a correction. One reason is that funds go into retirement plans at this time of year, and many investors have cash ready to invest as prices fall.
“It’s the expensive stocks that are likely to get hit harder. Certainly, on a relative basis, I think value will outperform growth, not only now but this year because of the interest rate uncertainty ahead, at least through the third quarter,” he said.
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 posted average declines since World War II, due to the uncertainty of approaching mid-term elections.
Trivariate Research founder Adam Parker said the Nasdaq’s comeback Monday was encouraging.
“I do sees this as an opportunity to get more optimistic, and I am optimistic,” said Parker.
“I think there are individual securities that will still go much lower because they got overvalued, whether they’re work-from-home places that don’t really have a technology move, or software companies that aren’t going to generate real profits for a long time,” Parker said. “It’s kind of junior varsity to say all these things are worthless because rates are rising. Those businesses that have been partially discounted, you’ve got to like them more now.”