CHRIS BURRELL ’ S BLOG
Finally a Correction in the Overvalued NASDAQ The January blog concluded with the following Burrell View : Burrell View
The pent up cash from COVID will continue to be spent in Australia and the US , such that economic growth will be positive . However , high inflation will spur central banks to taper and then cease their bond buying , thus allowing interest rates to rise to market levels . A combination of higher interest rates and inflation will challenge valuations of those technology stocks that are not in the category of Growth at Reasonable Prices ( GARP ), being rather Growth at Any Price ( GAAP ). Such stocks have already commenced to adjust both in the US and to a lesser extent in Australia , because our market is not nearly as hyped . In the 2000 tech bubble correction , the US went up dramatically and came back , while Australia chugged along on a slight upward trend . This is the central case going forward for 2022 .
Within that backdrop , there are a number of sectors and stocks within those sectors which are expected to produce 15 % returns . They include materials , energy , gold , some banking and a number of other stock specific opportunities . Internationally , there remain opportunities , especially within the value stocks .
A number of stocks that were early beneficiaries of COVID such as supermarkets and hardware have had two years of momentum and support , so that even in Australia , there is likely mean reversion of share prices and we have seen this in recent weeks . It will be useful to have a list of businesses and stocks with price targets at which one is prepared to buy . This approach means taking profits and capital gains on those stocks , which are fully or over-priced so as to carry say 10 % in cash to take advantage of the opportunities , which are likely to arise this year given the enhanced volatility from the backdrop outlined above .
A Black Swan event is possible in 2022 from some of the geo-political issues such as China / Taiwan , Russia / Europe and corporate stresses such as Evergrande and the Chinese property sector generally . It is more likely that these events will not be a Black Swan , but will act as a catalyst to poke the markets to focus on the main strategic issues of high inflation leading to higher interest rates and corrections to overvalued businesses / stocks . 2022 will be a year of hard work to produce returns compared to the COVID recovery .
January 2022
The Burrell view has been a good explainer of markets over recent weeks . The NASDAQ and the New York Stock Exchange ( NYSE ) are the two major US stock exchanges . The NASDAQ has a specialty in technology stocks and so has outperformed the Dow Jones ( NYSE major stock index ) in the years to the peak in November 2021 . However , valuations as noted in the previous blog are at extreme levels for some stocks and are expected to correct , particularly for those stocks where high growth is not delivered . In aggregate , the NASDAQ fell from 16,202 to 13,352 i . e . by 2860 or 17.6 % to a low on 26 January 2022 , coincidentally Australia Day . The impact of valuation , higher inflation numbers and central banks announcing tapering of bond purchases and likely rate increases had driven these falls . Those events then ran into the reporting season and two of the five FAANG stocks reported poorly , falling by over a quarter of their market capitalisation . These were Facebook ( META ) and Netflix . These stocks have long been overvalued . On the other hand , Apple , Google and Amazon with leading business models and products reported well and those stocks together with Microsoft , which also reported well , lifted the indices . The NASDAQ at the time of writing is now down 13 % from the November highs , while Microsoft ( in the Dow ) helped the Dow to recover so it is only down 5 % from the November high , having reached a decline of 7.5 % to 34,160 on 26 of January .
It may be expected with the change from sentiment and momentum to a greater valuation focus that there will continue to be stocks which disappoint and thus pull the NASDAQ down . Burrell clients have little exposure to these stocks .
In Australia , the overvalued technology sector has also seen some material corrections downwards and this is a healthy sign .
On the other hand , the broad market has continued to see some opportunities from the overall volatility and this should continue in the months ahead . There are indeed a number of sectors and stocks within those sectors which are expected
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