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Nasdaq Index Alert: Why Tech Stocks Gained 10% in January 2023

  • The Nasdaq Composite enjoyed a historic first month to the year, climbing more than 10% in January.
  • January has long set the tone for the year to come, leading some investors to predict a strong year for stocks in 2023.
  • Unfortunately, with the Fed still pushing for more rate hikes into the year, it’s unclear just how long the bullish wave will last.
Source: Shutterstock

The tech-heavy Nasdaq Composite managed to climb a staggering 10% in January. After shedding more than 30% of its value in 2022, investors everywhere are wondering if now is the time to get into the high-growth index. What’s behind the Nasdaq’s surprise growth spurt last month?

It seems the Nasdaq is in the midst of an identity crisis lately — it can’t seem to decide if it’s having a bear or bull market. Last month represents its best January in more than 20 years. Indeed, the Nasdaq soared 10.7% in the first month of the year, seemingly off the back of strong earnings and promising inflation data.

Companies like Warner Bros. Discovery (NASDAQ:WBD), Tesla (NASDAQ:TSLA) and Western Digital (NASDAQ:WDC) enjoyed a gargantuan start to 2023, serving no small role in the Nasdaq’s climb. Indeed, WBD, TSLA and WDC shares are respectively up 67%, 74% and 42% year-to-date (YTD).

The Nasdaq isn’t alone in its early-year strength, however. The S&P 500 climbed more than 6% in its first month of the new year. Meanwhile, the industrial-heavy Dow Jones enjoyed a nearly 3% uptick.

Inflation was another bright spot in the new year. Both the Consumer Price Index (CPI) and Federal Reserve-preferred Personal Consumption Expenditures (PCE) reports came in stronger than many analysts expected. Indeed, last week’s PCE showed just 5% annual inflation in December, a notable deceleration from November’s 5.5% reading and October’s 6.1% gauge.

January’s strength has raised hopes that this year will reverse 2022’s historic bear market.

“We’re seeing all of these historical major drivers of the market starting to all point in a direction that we think would be supportive of equity market gains over the next few months,” said Greg Bassuk, CEO of AXS Investments.

Can the Nasdaq Index Hold Strong Through Fed Tightening?

This strong start is an unabashedly promising sign for the year ahead. January has long been considered a barometer for the full year, with some strong evidence backing its validity.

According to CFRA Chief Market Strategist Sam Stovall, a strong start usually gives way to a bullish year:

“Since World War II, if the market is up in January, it has continued to rise in the remaining 11 months of the year more than 85% of the time and average gain is about 11.5 % […] So the old saying, ‘as goes January, so goes the year,’ popularized by the Stock Trader’s Almanac, is a true one.”

Especially following a negative year, a strong first month will often lead to impressive rallies — 14% on average. In that same vein, the top performing sectors in January tend to outperform for the rest of the year. The top sectors this January were communications services, consumer discretionary, real estate and technology.

The markets have certainly put on rose-tinted glasses for the time being, perhaps justifiably so. However, there are still some legitimate points of concern going forward — most prominently the Fed.

At the Fed’s rate hike announcement this week, Fed Chair Jerome Powell was once again stern and straightforward with his expectations for the year. As much as analysts talk about a dovish pivot, expect rate hikes to continue well into 2023.

Powell had the following to say after the recent Fed meeting:

“Inflation data received over the past three months show a welcome reduction in the monthly pace of increases […] And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”

As the central bank continues to push the federal funds rate up, many expect the economy to take a recessionary dive at some point this year. The aggregate fall in demand could prove the end-all be-all of bearish indicators, something the recent tech layoffs only qualify.

Whether that outcome plays out in its entirety, or if the Fed is hiding a secret dovish agenda, remains to be seen.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

Article printed from InvestorPlace Media, https://investorplace.com/2023/02/nasdaq-index-alert-why-tech-stocks-gained-10-in-january-2023/.

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