After a raging bull market lasting the best part of 10 months, we finally saw the beginnings of a correction early this week as swathes of growth stocks slipped from their recent lofty heights. Many have been expecting this for some time, given the unreasonably astronomical valuations of some companies, particularly in the tech and EV sectors. And while these kinds of equities were worst-hit by the pullbacks, Monday’s declines were more or less felt across the board… with one notable exception.
Come fly with me
Contrary to the overarching trend, long-suffering cyclicals, such as aviation and leisure, have been going from strength to strength, with many airlines up between 15-20% in the past 7 days. This is largely understandable in light of the relative success of the worldwide vaccine rollout, which would seem to suggest that the summer holiday season will go ahead as usual this year. Moreover, considering how unduly suppressed these stocks have been over the last 12 months, it’s hard to imagine how they could go any lower. Indeed, many analysts expect these industries to receive a significant windfall once consumers are free to exercise all of their pent-up demand for travel services.
What goes up must come down
As touched upon above, the biggest losers early in the week were precisely those companies whose share prices had exploded of late. Tesla, for instance, is still down almost 10% from last Friday and over 20% from its late-January highs, but this only tells half the story. Despite these recent losses, the audacious automaker is actually up over 700% from its coronavirus-crash lows. Baidu — oft called the Chinese Google — is another stock that is down almost 20% from its all-time high recorded last month. Yet, once again, it is still sitting on a more-than-respectable 350% gain from its March 2020 minimum. This would seem to suggest what many already feel: this is nothing more than a minor correction on the path to even stronger growth ahead.
Don’t fear the yield
Indeed, at the index level, Monday’s losses were all but wiped out as early as the close of trade on Tuesday as the Nasdaq ended the day back above 13,500.00. But how did equities manage to turn the tide so quickly? That’s right: it was Powell to the rescue once again. The Fed chairman succeeded in soothing investors’ inflation concerns and reiterated the US regulator’s stimulus position, confirming that they would not be withdrawing economic support for some time to come. Many had been worried that current high short-term bond yields meant an increase in price pressure was around the corner, but Powell reassured markets that this was instead an indicator of growing confidence in the global economic recovery, prompting investors to ‘buy the dip’.
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