The Nasdaq composite index has experienced extreme weakness in the first few trading days of 2024. The sell-off is the worst since October 2022.

The market has sold off for several reasons. Treasury yields are rising. The yield on the 10-year Treasury fell as low as 3.88% at the end of 2023. On Friday, following the stronger-than-expected
employment
report, the yield jumped well above 4%. Other factors contributing to market weakness include pressure on
Apple
, the largest market capitalization equity in the market. Investors are concerned about its exposure to
China
.


HOUSE REPUBLICANS FIND BORDER CRISIS ‘STOPPED’ IN EAGLE PASS AFTER CARTELS HALT OPERATIONS

The Nasdaq composite is market capitalization-weighted. Share price movements in the largest stocks have a larger effect on the index. Apple has a 12% weighting, Microsoft has an 11% weighting, Amazon has a 6% weighting, and Nvidia follows at 5%. For simplicity’s sake, it is fair to say that where the big four go, so too will the composite index.

Big technology and the Nasdaq composite performed exceptionally well in 2023. The index was up 43%. Apple appreciated by 46%, Microsoft was up over 60%, and Nvidia was up a whopping 246%. Profit-taking becomes irresistible for many, but no one likes to pay taxes, so many investors delayed taking profits until the new year so tax liability would be delayed for as long as 15 months.

Another factor in the short-term weakness was excessive enthusiasm. Everyone was bullish. Such an extreme sentiment indicator often signals a short-term correction. The most important factor in the early year sell-off is unexpected strength in the economy. The December 2023 employment report, including the important hourly wage data, was stronger than expected. With the better-than-expected economic outlook, the Atlanta Federal Reserve raised its fourth-quarter GDP forecast to 2.5%. The market is paring its expectations of interest rate cuts by the Fed. The market had anticipated 150 basis points, 1.5%, in rate cuts in 2024.

Traders now place a
57%
probability that the Fed will cut rates at its March meeting, down from almost a 100% probability just one week ago. Put simply, expectations have been reset.


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Still, the outlook for equities in 2024 is positive. The Fed will cut rates in the first half of 2024. The 2% inflation target has been
met
on a six-month basis. In addition, real-time shelter inflation is running at
1%
or lower, while shelter inflation as reported by the Bureau of Labor Statistics is being recorded at 5% to 6%. With 2% real inflation and a targeted federal funds rate of 5.25% to 5.5%, policy is extremely restrictive.

The point deserves emphasis: real rates are at least 2% higher than the neutral rate, which is excessively restrictive. Such restrictive policy could cause something “to break” in the economy. It is slowing, and the employment market is normalizing, suggesting that wage rates will continue to fall. Top line: the Fed will cut rates. The Nasdaq composite and the broader market will move higher. Investing in a diversified portfolio of equities is the best way to build long-term wealth. Keep the faith.

The writer owns shares in Alphabet-Google, Meta, Microsoft and Nvidia.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.

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Don’t obsess over the Nasdaq downturn

6 1
08.01.2024

The Nasdaq composite index has experienced extreme weakness in the first few trading days of 2024. The sell-off is the worst since October 2022.

The market has sold off for several reasons. Treasury yields are rising. The yield on the 10-year Treasury fell as low as 3.88% at the end of 2023. On Friday, following the stronger-than-expected
employment
report, the yield jumped well above 4%. Other factors contributing to market weakness include pressure on
Apple
, the largest market capitalization equity in the market. Investors are concerned about its exposure to
China
.


HOUSE REPUBLICANS FIND BORDER CRISIS ‘STOPPED’ IN EAGLE PASS AFTER CARTELS HALT OPERATIONS

The Nasdaq composite is market capitalization-weighted. Share price movements in the largest stocks have a larger effect on the index. Apple has a 12%........

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