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US stocks are down in the dumps, but for how long?

Fri, 02/10/2023 - 17:26

For many US stockholders, 2022 was a year to forget. During the heady pandemic heights of unbridled growth, it felt at times as though the only way was up for equities. But, as is always the case, sooner or later, the bubble has to burst…and burst it did. Unsurprisingly, it was those companies that had gained the most in 2020-2021 that suffered the worst. Many of these, such as Tesla, Meta (formerly Facebook) and Salesforce, have appeared to be in freefall throughout the past twelve months as ever-lower lows became the norm.

This was, however, a worldwide phenomenon. In China, Alibaba, Baidu, Tencent and other tech darlings also suffered a similar fate. Europe’s stocks have had their fair share of pain amid ongoing geopolitical uncertainty, spiralling energy costs and soaring inflation. But in Q3/4 2022, that all changed. Since then, China’s tech giants have managed to regain almost 30%, while the DAX is up over 20% in the same period. The S&P 500 and Nasdaq, on the other hand, have been relatively flat in comparison, barely managing +10%. What is behind this lag, and does it mean that a bottom is now in place for US stocks?

What goes up must come down

It’s no secret that US tech was the stand-out sector of the 2020-2021 market boom. From its March 2020 low of 6,879.50, the Nasdaq index more than doubled over a period of 18 months to reach an all-time high of 16,057. But some individual stocks like Tesla had gained many multiples higher than this, with the futuristic automaker growing more than 1000% over this time. Viewed through this lens — and with the benefit of hindsight — it’s clear to see that these valuations were completely unsustainable.

All it took was a slight jolt to bring the entire house of cards tumbling down. And that ultimately came in the form of rising inflation and the collective realisation that the end of the pandemic wasn’t going to be the panacea for the economic problems that had been festering over two years of rolling lockdowns many hoped it would be. A totally predictable flight from risk ensued, resulting in devastating losses for unduly inflated asset classes like crypto and tech stocks. Tesla proceeded to a long, slow decline that eventually saw it lose around 70% of its ATH value. This pattern was repeated across a whole host of other tech names; Meta, PayPal and Salesforce all lost between 60% and 70% over the same period.

Insult to injury

If the massive anti-climax of phasing out coronavirus restrictions wasn’t bad enough, things only seemed to get worse after Q4 2021. First came the rampant double-digit inflation that saw prices of everything from consumer staples to industrial aggregates race to ever higher highs, forcing ordinary people to cut back their spending in any way they could. Then, we had the energy crisis and a severe escalation of the geopolitical situation in Europe to contend with. Not to mention the ever-present spectre of a global recession. 

All of this naturally put the boot on the neck of an already weakened stock market. Surprisingly, though, precious metals remained relatively flat. That left really nowhere for anyone to park their cash except in, well, cash. This supported the USD and actually made it the best-performing instrument of 2022. Another side effect of this was that investors, both retail and institutional, had capital literally burning a hole in their pockets. Thus, we were always going to reach a point when natural price discovery made risk assets good value again. And that’s exactly what happened. Perhaps the most volatile asset class of all, cryptocurrencies, positively exploded this month. After losing almost 80% of its value, BTC has now gained 35% in 2023 so far.

Let’s get technical

As we touched upon before, the S&P 500 and Nasdaq have barely managed to gain 10% from local lows. Meanwhile, crypto, Chinese stocks and even European equities are up over 30% on average. Given the relative security and insulation of the US economy from many of the problems plaguing the globe — and Europe, in particular — this disparity in performance simply doesn’t add up. 

Indeed, most technical analysis suggests that the bottom has been and gone for US tech. Take the Nasdaq 100, for instance: virtually all of the TA available rate it as a “Strong Buy”, with the RSI, all the MAs (5,10, 20, 50, 100, 200), and the ADX predicting growth ahead. A break upward through the 11,500 mark will be received as a positive signal by market participants, and with the RSI curve showing a rising trend, there is reason for us to hope that a trend reversal is in its early stages. It’s a similar story for individual stocks like Meta and TSLA, too, with analysts at giving them a 12-month price target of 156.75 (+10%) and 199.60 (+38.20), respectively. This makes current entry points highly attractive for both wide indices and individual blue chip tech stocks.

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