After rallying for most of the last four months stocks have been down for the last three weeks.
The S&P 500 (SPY) fell as much as 5% from the 52-week high.
The tech heavy NASDAQ 100 (QQQ) was down as much as 11%.
Take a look at the chart below of 2021.
Why have stocks been weak?
This bout of weakness is being driven by three forces.
- Stocks have seen huge gains in the last year.
- Tech valuations are historically high.
- Rising interest rates weighing on stocks.
Despite this bout of weakness this is not the time to panic.
The stock market doesn’t go straight up and it doesn’t go straight down. It’s normal for stocks to take a breather and consolidate after a big run higher. That is what is happening now. Stocks are up big since early November and up even more in the last year. The NASDAQ recently soared deep into a new all-time high. After the string of gains its normal for shorter term traders and investors to lock in some gains. This usually sets the foundation for a new rally, creating en entry point for investors looking to buy the dip.
Tech stocks have been weaker than regular stocks. This is happening because tech is up huge in the last year. I am still highly optimistic on the tech sector – but bigger gains will usually trigger bigger pullbacks and that is what’s happening here.
COVID will remain a lingering concern but from an economic perspective we are past the worst of it. The global and US economies are both set to see a big rebound and expansion in 2021 and that should be a tailwind for stocks.
Just as they have been doing, global central banks will likely continue pumping cash into the economy. This will help keep interest rates low and inject extra liquidity into the financial system and both of those are good for stocks.
Momentum is still higher in stocks – just as it has been for the last five years despite sporadic volatility. The path of least resistance for stocks is higher.
What Should We Expect Moving Forward?
In the short run I expect to see more volatility – it is a natural part of a healthy market. But I am not expecting another stock meltdown like we saw back in early 2020 because of COVID. I expect stocks to stabilize sooner than later.
Beyond short-term volatility I am expecting another good year for stocks. I think stocks will close 2021 with another solid gain.
- For young investors with cash, weakness in stocks is an opportunity to buy low.
- For retired investors – if the volatility makes you nervous think about scaling back stock exposure and increasing allocations to cash and bonds.
I’ll be back next week with another update. Have a great week!
