In this Stockhead series, Josh Gilbert – market analyst at global investment platform eToro – gives investors the scoop on all things Nasdaq related; the key market themes, along with popular investment trends based on eToro’s data and insights.
Bring out the bears
This week, the Nasdaq officially entered into bear market territory, down 20% from the highs at the back end of 2021.
Volatility ensued, with the VIX trading at its highest level for over a year as investors continued to digest the fallout from geopolitical tensions.
The longer the geopolitical tensions continue, the more costly it is likely to be.
Global economic growth will slow, and inflation will continue to rise.
The countries closest to Russia and Ukraine will feel the impact the most, and globally, soaring commodity prices are the biggest concern as this will continue to keep inflation elevated.
Macro headwinds
We are moving into a new investing world which many new investors wouldn’t have seen before.
Less growth, higher rates, lower returns and increased volatility.
Throughout March, investors will be focused on the macro environment as the Federal Reserve is set to hike rates for the first time since 2015 at its meeting on March 16.
Markets are now forecasting six US interest rate rises this year, and for the Fed to reduce its huge US$9 trillion balance sheet.
Right now, the CME target rate probability is calling for a 25bps hike on March 16, but this week’s inflation data (Thursday night EST) could change that.
CPI data is expected to come in at 7.7%, a new 40-year high, but some economists believe it could be as high as 8%.
Earnings season
Outside of the geopolitical tensions, it has been a solid Q4 earnings season, with US corporates reporting 31% earnings growth.
However, we saw a few high profile misses from names such as Netflix, Meta, Paypal and Roblox all missing the mark.
Combined with headwinds in the broader market environment, those earnings misses resulted in sharp selloffs.
All four stocks have now had more than a 50% drawdown, with Roblox and Paypal almost 70% off from their recent highs.
Buying opportunities?
These drawdowns are piquing the interest of investors as potential buying opportunities — especially in a big tech name such as Meta.
The stock is now trading at around 15 times forward price to earnings, as slowing growth and legal issues dampen sentiment.
In addition, its Q4 earnings report (as mentioned above) was a disappointment, with the report showing Facebook was now struggling to attract users, with no growth in daily active users from Q3 to Q4.
Those with higher risk tolerances that can focus on long term growth will see these names trading at these drawdowns as great opportunities.
The more risk-averse investors can consider ‘dollar-cost averaging’ to manage volatility, but still capture upside.
Cyber wars
I also think we can look to cyber security stocks in the near term.
Companies are continuing to position themselves for the digital transformation taking place.
In addition, there is a growing concern that massive cyber warfare could be on the near-term horizon with the current geopolitical tensions.
This is likely to see major corporations ramp up their cyber spending over the next 12 months.
Alphabet also just announced an all-cash acquisition for cyber security firm Mandiant, valued at around US$5.4 billion.
This deal will provide Google with more tools to protect its cloud-based clients as they continue to grow the cloud segment to further compete with Microsoft and Amazon.
Investors should also watch for further M&A activity in the cybersecurity space and big tech, given Microsoft were also rumoured to be interested in acquiring Mandiant.
This article was developed in collaboration with eToro, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.