By Hussein Sayed, Chief Market Strategist at Exinity
Last week was painful for investors, especially those with portfolios heavily tilted towards tech stocks and speculative assets like cryptocurrencies.
The S&P 500 declined 5.7%, notching its third straight weekly loss, and closed below its 200-day moving average. Losses in the Nasdaq Composite deepened further after the index entered correction territory a week earlier and the index is now down 15.1% from the intraday peak recorded in November 2021.
Both indices logged their biggest weekly declines since the onset of the pandemic in March 2020.
Stimulus withdrawal and expectations of tighter monetary policies are not the only reasons driving stocks lower; it’s the negative earnings surprises from some of the biggest firms that are worrying investors.
Lockdown-beloved stocks are being punished the most, with Netflix plunging 21.8% on Friday after the streaming giant anticipated weak subscription growth as competition heated up from Disney and other players. A day earlier, shares of Peloton Interactive, the provider of at-home exercise equipment, lost 24% of its value after the company said it was reviewing the size of its workforce and other reports of halting production due to falling demand.
Zoom, the video conferencing software maker, is now trading at a fraction of its 2020 peak, having lost 74% of its value since.
Again, cryptocurrencies failed to protect portfolios as a hedge against the market turmoil or higher inflation. Most digital assets have lost a quarter to a third of their value this year, with Bitcoin, the most prominent digital token dropping to a six-month low at $34,625.
However, the general outlook is not as gloomy as it appears in some asset classes.
The weak results for companies that profited during the worst of the pandemic are a bullish signal for the public in general.
Fears of Covid-19 and its variants have diminished incredibly over the past few weeks. Many countries are now scrapping most of their pandemic restrictions, with social distancing likely to be something of the past.
Companies benefitting from the reopening of economies, like airlines, restaurants, and other hospitality firms may continue to benefit despite anticipation of higher interest rates and bond yields.
Given that inflation is not going away anytime soon, investors should consider being overweight cyclical companies with high profit margins and reasonable valuations. Tech will remain a long-term play despite the current turmoil, but one needs to be selective and focus on firms with solid balance sheets, profit margins, and growth prospects.
This week, big players in the tech industry will release their Q4 2021 results, including Apple, Microsoft, Tesla and IBM. Robust results are required to help equities recover from last week’s selloff.
However, the Fed’s monetary policy meeting, which wraps up on Wednesday, remains the main event of the week.
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Exinity ME Ltd, a company registered under the Laws of the Abu Dhabi Global Market (ADGM), is authorised and regulated by the Financial Services Regulatory Authority (FSRA)