Markets wrapped up a rough January with a rally, and investors were quick to snap up the tech shares that have taken a battering throughout the month. However, the two-day rally did not prevent January from being the worst month since March 2020, when the pandemic shut down the global economy. The record dismal January was driven by investors' fears and anticipation of the Federal Reserve’s raising interest rates several times this year.
The S&P 500 closed the month down 5.3%, although it rose 1.89% on Monday. This makes it the worst month since the loss of 12.5% in March 2020 and a record January decline since 2009. The Dow Jones Industrial Average, which had a loss of 3.3% for the month, was helped by the 1.2% rally on Monday. It benefited from being underweight in tech shares. The Nasdaq Composite Index, a tech-heavy index, lost 8.9% for January, although it rose 3.41% on Monday. Also, a record month of losses since March 2020.
Analysts think stabilization is on the way. After much volatility, they expected investors to shift from growth to cyclical stocks. But this past week has made that expectation redundant. Nevertheless, investors are still interested in growth stocks despite the storms of the past weeks.
After the Fed announced its intention of raising interest rates in March 2022, investors started pricing it into their calculations. They say they think there would be five quarter-percentage-point raise hikes beginning from March. This hit tech shares hard in January because investors believed higher interest rates would raise their operating costs and expose their higher valuations of tech stocks. But as the month ended, I think investors are beginning to rethink that valuation.
For example, after Citi upgraded Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT), they surged 11% and 13%, respectively. Citi said it was an attractive time to buy both stocks because of their pullbacks. But that was not enough to prevent Netflix from dropping 30% this month and Spotify falling by 16%.
Tesla (NASDAQ: TSLA) was one of the big gainers on Monday. It gained 10% but its drop for the month was 11%. Credit Suisse helped prop up Tesla when it upgraded the stock because it believes that the market has been unfair to Tesla.,
Besides tech, Boeing (NYSE: BA) topped the gainer's chart in the DJIA, as it rose 5% after the deal with Qatar airlines of about $34 billion was announced.JC O’Hara, MKM Partners Chief market technician, believes that the market is beginning to see the bottom. However, in a note, he said investors should trust the process.
“The economic conditions favor the markets. By the way, we are not witnessing a systematic problem. Rather what is happening is a valuation reset because investors’ expectations are swiftly changing about the future path of rates and its effects,” O’Hara said. The chief investment strategist with Leuthold Group, Jim Paulsen, notes that the first step towards ending a correction is to “force some panic-selling and make the most emotional investors exhausted. If that happens, the markets will begin stabilizing. But we do expect a test of Monday’s low, and if that fails, the markets might go lower.”
Analysts and investors are undecided if Monday’s rally was a fluke. They are still digesting this transition period. This week, the earnings reports from the biggest names in the market like Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Meta Platforms (NASDAQ: FB), and many more were mixed. These results did not resolve the present riddle.
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