U.S. stock markets have experienced another brutal week. Inflation fear and soaring bond yields are some of the concerns that are trying to burst the higher stock valuation bubble. The Dow Jones Industrial Average, among two other stock indices—the S&P 500 and the Nasdaq Composite—is the only index holding on to its yearly gains. The fear is that we could see an even more intense sell-off that could crash the stock market.
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The Dow Jones Industrial Average is up 1.04% year-to-date (YTD), and it is down nearly 4.23% from its all-time high of 31,984 points in mid-February. The S&P 500 stock index is barely up YTD. Yesterday, the index erased all of its yearly gains, but traders were able to push the stock index into positive territory by the end of the day.
The Nasdaq Composite index is facing a brutal sell-off this year, and it is down nearly -3% YTD. The index is firmly in the correction territory as it has dropped over 10% from its all-time high of 13,879—formed on April 16 this year.
The fundamental factors that are causing the stock market to tank are fear of higher inflation and tech stock valuation. The reason is that dovish monetary policy (Fed buying assets and keeping interest rates at an all-time low) and stimulus support are aiding the economic recovery process.
Traders believe that the Fed will increase the interest rate, which could hurt the economic growth as economic recovery is still fragile. Simultaneously, some speculators also hold the view that inflation is getting out of control, and soon it will pass the Fed’s comfort level. This could prompt the Fed to take appropriate action, which could include tapering the asset purchase program.
However, the Federal Reserve Bank Chairman, Jerome Powell, has assured the market this week that the Fed can stomach higher inflation as it is likely to be a short-term issue. Stock traders are not buying into this narrative at all, and despite his best efforts, the U.S. stock market has been under tremendous selling pressure.
No, we can hardly say that. The U.S. stock market is in a healthy correction mode as fundamentals will only improve as more people get their vaccine shots. Coronavirus is the initial reason that the U.S. economy was brought to its knees.
So why are we saying the stock market is tanking?
To answer this, one needs to look at things more closely. The fact is that the S&P 500 is heavily influenced by tech stocks, and it is the tech sector that is facing more punishment due to valuations being too high. For instance, Apple constitutes nearly 10% of the S&P 500.
If we look at other sectors such as travel, airlines, banking, and energy, all of them have decent upward moves. Although, yesterday, apart from the energy sector, all other sectors were hit with sell orders.
Drilling further into this, it becomes clear that stocks like American Airlines, United Airlines, Delta Airlines, Marriot Hotels, IHG, Goldman Sachs, JP Morgan, Citibank, BP, Chevron, and Exxon Mobil, all have done a lot of heavy lifting this week. But, companies like Amazon, Apple, Facebook, Alibaba, Baidu, Tesla and Zoom are pushing the U.S. stock market lower.
Inflation fear is overblown; the U.S. economy still has a solid foundation. The Fed can adopt several strategies to address inflation and higher yields.
To conclude, tech stocks need to stop moving lower, and the rest of the sectors can push the stock market higher.
I was awarded a national award (Young Irish Broker) in 2010. I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading, I have