Mohit Oberoi
US stocks jumped yesterday and closed January with strong gains. The Nasdaq Composite Index, which lost 33% in 2022, closed January with gains of 11% which is the highest since 2001.
The Nasdaq underperformed other indices in 2022 as tech stocks bore the brunt amid the pessimism toward growth names. The S&P 500 fell almost 20% last year and had its worst year since 2008. The Dow Jones index fell around 9% last year.
US stocks started 2023 also on a negative note. However, markets have since rebounded and the Nasdaq has closed with gains for four consecutive weeks. The index outperformed in January as tech stocks rebounded.
The rise in Nasdaq is a welcome break for investors. The Wall Street Journal reported that whenever the Nasdaq rose 10% or more in January, the index delivered returns of 14% on average in the remaining 11 months.
However, there’s a catch. In 2001, the Nasdaq fell 20% in the remaining 11 months of the year after having gained 12% in January.
Many drew parallels between the 2022 stock market crash with the dot com bust. Indeed, tech stocks, especially the loss-making names many of which have unproven business models, crashed badly in 2022.
The Nasdaq’s 33% fall in 2022 does not fully captures the pain in newly listed tech stocks. Many of the newly-listed companies lost over 80% of their market cap last year.
Why did Nasdaq Composite Jumped in January
Higher inflation and the resultant rate hikes by the Fed worked to the nemesis of markets in 2022. However, there are now ample signs that inflation is receding. Both consumer and wholesale inflation fell 0.1% in December.
The CPI rose at an annualized pace of 6.5% in December and the pace of price rise has fallen for six consecutive months. The PCE (personal consumption expenditures), which is the Fed’s preferred inflation gauge, rose 5% annualized in December which is two percentage points lower than the 2022 highs.
The core PCE rose 4.4%. The metric, which excludes volatile food and fuel prices peaked at 5.2% last year.
Falling inflation has raised hopes that the Fed would now slow down the pace of rate hikes. The FOMC meeting is underway and markets are almost unanimous that the US central bank would raise rates by 25 basis points.
Higher rates took a toll on growth stocks last year and added to the slump in Nasdaq. There are meanwhile some investing strategies that can perform well in high inflation.
Fed Rate Hike Decision and Tech Earnings to Drive Markets
This week is quite crucial for markets as many Nasdaq constituents report their earnings. Yesterday, AMD and General Motors reported better-than-expected earnings. However, Snap stock is trading lower today as it posted yet another quarter of dismal growth.
We’ll get earnings from heavyweights like Apple, Alphabet, Meta Platforms, and Amazon this week. All these stocks plunged last year and only Apple could outperform the Nasdaq Composite. However, even Apple stock fell more than the S&P 500 last year.
Today, the Fed would also announce its rate hike decision. However, markets might be more interested in the tone of Fed chair Jerome Powell who has so far shown an inclination to sacrifice growth in order to tame inflation.
The Fed has played party pooper almost consistently since August last year when Powell dashed all hopes of a pivot. Investors would closely watch Powell’s press conference today to gauge whether the US central bank maintains its hawkish stance despite the more than visible slowdown in the US economy.
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This article was written for Business 2 Community by Mohit Oberoi.
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