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Market Insights

Nasdaq: bear market rally or recovery?

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US equities finally found some relief over the past few days. Focusing on the Nasdaq, the fall below the 12,000 level was short-lived and quickly recovered. Price is now re-establishing in the 12,200 to 12,500 zone.

Nasdaq 100

So, is this the start of a big recovery and the march back to prior all-time highs? If only we knew! Bank of America’s chief investment strategist Michael Hartnett has some cautionary thoughts however:

"Fear & loathing suggest stocks prone to imminent bear market rally but we do not think ultimate lows have been reached, nor ultimate highs in yields."

Fear & loathing is the name Bank of America gives to certain metrics within their investor surveys and data. The general idea is that the more loathed and feared a market move is, the more it has to run. Then, once investors capitulate, it’s safe to get involved. That’s the theory at least.

The argument put forward most recently is that sentiment and positioning became overstretched, so a bear market rally is imminent (and perhaps what we’re seeing now?). However, many of the capitulation metrics haven’t been fulfilled, so Hartnett sees worse to come in future.

One of his main capitulation markers is when "investors sell what they love".

Megacap stocks such as Apple, Microsoft, Tesla & Amazon could be among those favourites. All four rallied between 2 and 5% on Tuesday as the index put in a strong showing. As some of the larger stocks in the index, they’re usually well-monitored, but perhaps more so in future following Hartnett’s comments.

Can profit margins be maintained with high inflation & the talent war?

And are these companies the same beasts they were pre-pandemic? Amazon’s prior reputation for relatively low pay is way behind them as they’ve embarked on a hiring spree that CEO Jassy recently admitted they may have overdone.

Back in February, Amazon also more than doubled their salary cap for corporate and tech workers (from $160,000 to $350,000), as they were “increasing overall compensation ranges for most jobs globally, and the increases are much more considerable than we’ve done in the past.”

Microsoft is following suit, with CEO Satya Nadella pledging to make “a significant additional investment in our compensation programs”. In a memo to employees he added

“Time and time again, we see that our talent is in high demand, because of the amazing work you do to empower our customers and partners,” “Across the leadership team, your impact is both recognized and deeply appreciated — and for that I want to say a big thank you. That’s why we’re making long-term investments in each of you.”

Rising costs could become a concern for every company

Retail giant Walmart’s shares fell by 11% on Tuesday, the most in a single session since 1987. The firm reported a 25% drop in quarterly earnings and cut their full year profit outlook, citing the rising costs of fuel and workers as pressuring the bottom line.

If the megacaps begin to face similar pressures, maybe Hartnett’s caution will prove warranted.

Not investment advice. Past performance does not guarantee or predict future performance.

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