Why the 2023 rally might be in trouble: Morning Brief

Updated Wed, Feb 22, 2023, 3:30 AM 4 min read

U.S. equities — particular tech stocks — are quickly weakening against a backdrop of interest rates that are once again surging higher. We've seen this play out several times since stocks peaked over a year ago when interest rate volatility in the bond market gave way to stock market volatility (meaning stocks sell off).

The difference in 2023 — as we've been writing — is that growth stocks (like the unloved tech stocks) had once again been leading the way after taking a back seat to cyclical and value stocks throughout 2022.

The chart above shows that many of the worst-performing stocks from 2022 are this year's winners. Last year's duds caught Wall Street flat-footed and short this year — mounting a vicious rip-your-face-off rally.

Tesla (TSLA) is up 60% in 2023 after shedding three quarters of its value from its November 2021 high. Nvidia (NVDA) and Meta Platforms (META) are each holding onto gains of 40% or more this year.

The result is that Investors who were massively underwater on tech names coming into the year were given a tantalizing reminder of the fast and furious gains made in the space in years prior.

Will the rally continue?

Things have moved so rapidly and into such unchartered territory over this business cycle that massive disagreements have emerged among investors looking at different things — each through their own lens.

Technical traders can point to charts of global indices and large U.S. sectors breaking out to new highs (as they've been doing since late-2022).
Macro investors may chalk off the 2023 rally as junk-led, YOLO-redux and point to a potential hard landing that's now simply been delayed.
Central bank and shadow banking buffs who track liquidity can point to the virtual flood of yen and yuan being "printed" by the Japanese and Chinese central banks this year — so big that it potentially offsets the Federal Reserve's quantitative tightening.
Finally, economists — after months of debating a hard versus soft landing — can point to a metaphor-destroying, "no landing" non sequitur.

Some of these theories are mutually compatible given the differing timeframes. But as the dust settles on Wednesday's rout, it's important to remember that low-quality stocks with bad balance sheets and cash flow are unlikely to lead meaningfully again — even if the major indices resume their rallies.

Callie Cox, US investment analyst at eToro USA, pointed out in a note to clients that looking inside the Russell 3000 — a broad measure of small, mid, and large-cap U.S. stocks — 44 of the 50 best-performing stocks this year didn't generate any profits over the past 12 months.

"That’s strange, considering that higher bond yields should entice investors to focus on profits and cash flows," she says, noting the cognitive dissonance.

Cox urges investors to tread carefully but not to run for the hills.

"When rates are high, it’s smart to focus on what’s making money now while keeping your guard up with hedges and a defensive lean," she says, adding, "Long-term investors may have an argument to take on some risk here, but they need to focus on quality companies, even if those quality companies fall into growth categories."

What to Watch Today

Economy

7:00 a.m. ET: MBA Mortgage Applications, week ended Feb. 17 (-7.7% during prior week)
2:00 p.m. ET: FOMC Meeting Minutes, Feb. 1

Earnings

Allbirds (BIRD), Altice USA (ATUS), Baidu (BIDU), Bath & Body Works (BBWI), Bumble (BMBL), Cheesecake Factory (CAKE), eBay (EBAY), Etsy (ETSY), Fidelity National (FNF), Lemonade (LMND), Lucid Group (LCID), Marriott Vacations (VAC), Overstock.com (OSTK), Rent-A-Center (RCII), Teladoc (TDOC), TJX (TJX), United Therapeutics (UTHR), Wingstop (WING), Wolverine World Wide (WWW)