Some investors have seen this kind of market before.
As an equity trader for the last 30 years, Brad Ginesin often uses that experience to recall a similar past situation that’s happening right now.
“There’s no doubt that today’s market is challenging to navigate,” Ginesin wrote recently on Real Money. He added that there are “similarities to past difficult markets for several key reasons,”
- Interest rates are set to rise
- The Federal Reserve intends to reduce its balance sheet
- Inflation and commodity costs are uncomfortably high
- Geopolitical tensions
- Post-bubble trading action
Starting with the last point first, Ginesin noted the market is digesting a post-pandemic bubble.
“The headline names are well known, such as Zoom (ZM) – Get Zoom Video Communications, Inc. Class A ReportTeladoc (TOC) – Get Teladoc Health, Inc. ReportPlatoon (PTON) – Get Peloton Interactive, Inc. Class A Report, [and] docusign (DOCU) – Get DocuSign, Inc. Report, for example,” he said. “These companies and other tech stocks were rewarded enormously, and the market is coming to terms with the reversal of the over-exuberance.”
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Meanwhile, the market-cap losses of widely owned stocks, like Netflix (NFLX) – Get Netflix, Inc. ReportPayPal (PYPL) – Get PayPal Holdings, Inc. Reportand Meta (MVRS)-Get Meta Report are staggering,
“That takes time to digest,” Ginesin said. “Years after the Nasdaq Bubble of 2000, tech valuations remained subdued. I would expect investors to be far more discerning of tech valuations for quite some time.”
On geopolitical trends, historically, many market bottoms occur when geopolitical tensions flare. Often it pays to be an investor with a shopping list upon geopolitical-related pullbacks.
“The crisis in Ukraine brought a classic ‘sell the rumor, buy the news’ event along with minor economic consequences, like a strong dollar, slower Fed rate hikes, and higher agricultural prices,” Ginesin said. “Headline risk and fears for the fate of the Ukrainian people, and a possible template for China to invade Taiwan, can justifiably drag on sentiment.”
Overall, the current market has many moving parts to contend with.
“In general, uncertainty and a tough tape keep investors’ long exposure lower than normal and holding extra cash,” Ginesin noted. “There are some good ingredients for a strong rally if the economy holds up well, but also plenty of cause for continued choppy markets.”
Investors should also watch for indiscriminate selling, as it does lead to trading opportunities.
“Yet, I would avoid stocks that still have post-bubble or SPAC-related digestion while buying the weakness of high-quality stocks with solid cash flow,” Ginesin added. “A flight to quality and elevated volatility bodes well for the top large-cap tech stocks, which will ultimately help market averages.”