Last year’s laggards lead US stocks rally in 2023, for now According to Reuters

© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 27, 2023. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Reuters) – U.S. stocks that took a hit last year are surging in the first weeks of 2023, sending markets higher. Some investors believe that trend is unlikely to last.

The staggering gains in shares of companies like Nvidia (NASDAQ:), Netflix (NASDAQ:) and Meta Platforms are lifting up sectors that struggled during last year’s sell-off, including technology and services. the media.

Smaller stocks’ declines in 2022 have also exploded: Goldman Sachs’ (NYSE:) basket of losing tech stocks that fell more than 60% in 2022 has recovered 21% in 2023, dwarfing gains. 6.5% of the S&P 500.

A variety of factors are driving these moves, including the allure of bearish stocks, falling bond yields and market participants dropping bearish bets on stocks.

However, some investors are skeptical that the gains will last, especially if the market continues to revise down expectations for the extent to which the Federal Reserve will need to raise interest rates this year to further lower interest rates. inflation heat.

Walter Todd, chief investment officer at Greenwood Capital, said: “While it’s not uncommon to see a trend reversal at the start of the year, “the extent to which it’s happened is quite impressive,” said Walter Todd, chief investment officer of Greenwood Capital, said.

Greenwood Capital recently sold at least part of its stake in several of the 2023 winners, including Meta Platforms and Netflix. Meta is up 45% year-to-date, while Netflix is ​​up nearly 18%. These stocks have fallen 64% and 51%, respectively, in the last year.

The index rose 6.2% in January as many investors rushed to increase their equity positions after easing last year, encouraged by several months of falling inflation figures. According to a report from Deutsche Bank (ETR:) released February 3rd.

Adjusted yields on bonds, which rose in 2022 as the Fed raised rates to combat soaring inflation, bolstered the ability to call on bonds that lost money last year. The yield on the benchmark 10-year US Treasury note fell about 40 basis points in the first few weeks of the year to 3.4% in early February after hitting a 15-year high last year.

While falling yields generally increase the appeal of stocks in general, they are particularly beneficial for growth and technology stocks whose valuations suffer as yields move higher in 2022.

“As interest rates fall, lower-quality, longer-maturity assets do well,” said Rob Almeida, global investment strategist at MFS Investment Management.

However, yields have rebounded in recent days, as investors make estimates of how far the Fed will raise rates and how long the central bank will keep rates at their highest levels. That weighed on stocks in the latest week, as the S&P 500 lost 1.1% after two straight weeks of gains.

Strategists at Wells Fargo (NYSE:) Investment Institute said in a note Thursday. “We do not consider recent breadth and leadership to be sustainable — however — and do not wish to pursue stock rallies at this time.”

Investors will keep a close eye on US consumer price data due to be released on Tuesday for signs that inflation is continuing to moderate.

David Kotok, chief investment officer at Cumberland Advisors, is skeptical about the latest rally and some of the stocks leading the current rally. His company is underestimating many of the big tech and growth stocks that have rebounded in 2023, favoring healthcare and defense stocks and keeping a large cash allocation.

“Either last year’s downturn caused by an overvalued space is over, or this is a dead cat bounce in a large hurt sector and last year’s bear market is not over yet,” Kotok said. I’m on the second side.”

To be sure, there are some signs that leaders can continue to do well.

Since 1990, the three best-performing sectors in January have posted an average return of 11.3% over the next 12 months compared with an average gain of 9.3%, according to investment research firm CFRA Research. of the S&P 500 during that time.

Matt Stucky, senior portfolio manager at Northwestern (NASDAQ:) Mutual Wealth Management Company, said some of last year’s biggest losers could continue to move higher in the near-term as investors investing to cover more short positions.

Short sellers have paid out $51 billion on their bearish bets through 2023, or about 6% of the total number of shares sold short, including more than $1 billion in each associated short. related to shares of Amazon (NASDAQ:) and Alphabet (NASDAQ:), according to financial statements and analytics firm S3 Partners.

“Can this last a quarter or two? Yeah,” Stucky said. “Can it last through 2023 or years? Chances are not.”

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