Can Stocks Recover After the S&P 500 Pullback In the Last Week?
May 08 2022 - 5:25PM
Finscreener.org
The last week saw all major
indices lose significant value as investors remain wary
about
macro-economic challenges
that include inflation, geopolitical
tensions, supply chain disruptions, steep valuations surrounding
growth stocks, and tepid forecasts provided by
corporates.
In the week ended on May 6, the
S&P 500 index fell 0.2% while the NASDAQ Composite Index was
down 1.5%. Comparatively, the Dow Jones index fell 0.24%. Right
now, the S&P 500, Nasdaq Composite, and Dow Jones have
slumped 13.9%, 23.3%, and 10.1% respectively year to
date.
Several tech stocks have burnt
massive investor wealth as rate hikes by the central bank and
inflation worries coupled with a sluggish macro-environment are
likely to impact consumer spending which has forced market
participants to reassess their equity portfolios.
Last week,
Shopify (NYSE:
SHOP) fell 15% in a single trading session after it
missed earnings and revenue estimates in Q1. Further, shares of
ride-sharing company Lyft (NASDAQ: LYFT)
plunged 36% after it provided weak guidance for Q2.
Bill.com (NYSE:
BILL) lost 30% in market
cap on the back of allowing top-line growth while
Cloudflare (NYSE:
NET) sunk 24% after it
forecast a loss in the June quarter.
The market mayhem is likely to continue
In an
interview with
CNBC, economist Brunello
Rosa who is the CEO and head of research
at Rosa & Roubini
expects quantitative tightening measures will negatively impact
economic activity. Rosa believes heavy selling in stock markets to
gain momentum as global central banks will continue to hike base
rates to offset inflation. Last week, the Fed raised base rates by
0.5% which is the largest hike since 2000.
Rosa explained, “Now it’s time
for a reappreciation of the economic fundamentals around the world
in terms of growth. It’s hard for markets to be totally optimistic
when inflation is going up, growth is going down and interest rates
are rising fast across the globe.”
The Bank of England which is the
central bank of the U.K. also warned about a looming recession as
the tightening of balance sheets by regulators will lead to a
contraction in economic activity.
Rosa also emphasized the
Russia-Ukraine war will last longer than anticipated adding to
headwinds in supply chains and keeping commodity prices
higher.
Investors will closely watch data
for the consumer price index for April which will release on
Wednesday as well as the producer price index which will publish on
Thursday. Economists expect CPI in April to rise by 0.3% for April
or 8.2% compared to the year-ago period.
Additionally, the 10-year
Treasury yield also surged past 3% for the first time in almost
four years. On Friday, the yield stood at 3.13%, up from 2.94% in
the prior week.
Where do invest when S&P 500 is under
pressure?
While the energy sector remains
the top-performing one in the last year, oil and gas stocks are
highly capital-intensive and cyclical. So, higher crude oil prices
will boost profits but climbing interest rates will eat into profit
margins as well. Additionally, if recession fears come true, there
is a good chance for energy stocks to trade at far lower multiples
next year.
Investors need to eliminate
company-specific risk and purchase funds or ETFs which will
diversify their overall portfolio. You also need to re-evaluate
your holdings of growth stocks and increase exposure to value
stocks in the near term. Investing in companies that are cheap and
have pricing power may seem the ideal bet in a challenging market
environment.
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