Stocks ended Monday lower following a solid rally last week. Investors may have jitters ahead of this week’s big Federal Reserve meeting, a deluge of earnings from top tech firms and the jobs report on Friday.
The Dow fell more than 260 points, or 0.8%, while the S&P 500 and Nasdaq slid 1.3% and 2%. Still, it’s still been a solid start to the year for the market — and many of last year’s losers have led the way on Wall Street so far in January.
The communications sector, with its many hard-hit tech and media companies, is the best performing market group so far in 2023: It has surged nearly 10%, according to data from S&P Global Market Intelligence. It was the worst-performing sector in 2022, plummeting 40%.
CNN owner Warner Bros. Discovery, which plunged nearly 60% last year, has surged more than 50% so far in 2023 and is the best performer in the S&P 500.
Several other media companies, old and new, have also enjoyed a resurgence this month. CBS owner Paramount has soared 35%. Disney (DIS) is up about 25%. Netflix (NFLX) has gained more than 20%. (So much for the death of streaming media?) Shares of Facebook and Instagram owner Meta Platforms are up more than 20%, as well.
Consumer discretionary stocks, which include many retailers and auto companies, have also enjoyed a stunning rebound after tumbling last year. The sector was the second-worst performer in 2022 with a loss of about 38%.
Just look at Tesla (TSLA). Elon Musk’s electric vehicle giant is up more than 35%. It too had a miserable 2022, losing nearly two-thirds of its value last year.
Investors seem to be buying into hopes the Fed will continue pulling back on the size of its rate hikes after several historically large increases last year and possibly even pause later this year. Increasingly, the sentiment is that the economy could wind up heading for a so-called soft landing: a slowdown but not a full-blown recession.
Those hopes have boosted other consumer stocks. Amazon (AMZN) is up about 20% this year. Cruise line owners Carnival (CCL), Royal Caribbean (RCL) and Norwegian (NCLH) are among the top performers in the S&P 500. So are shares of casino companies Caesars (CZR), Wynn (WYNN), Las Vegas Sands (LVS) and MGM (MGM).
Rising market tide lifting questionable boats
Still, some investors are worried this year’s market rally is eerily reminiscent of prior market bubbles.
That’s because it’s not just quality companies that are gaining. The resurgence is also clear in meme stocks. GameStop (GME) is up nearly 15%. Movie theater chain AMC (AMC) has soared about 25%. Crypto brokerage firm Coinbase has skyrocketed nearly 60%, despite the collapse of rival FTX and Coinbase’s own announcement of massive layoffs. Coinbase has been boosted by a rebound in bitcoin prices.
Then there are companies like Bed Bath & Beyond (BBBY) and Carvana (CVNA), both of which have enjoyed solid gains this year even though there are rumors of potential bankruptcy filings. Even if these companies avoid Chapter 11, it’s clear that they are financially distressed.
“We have seen speculation return to the forefront,” said Steve Sosnick, chief strategist with Interactive Brokers, in a recent report. Sosnick, not mincing words, has dubbed the rally in these types of companies a “flight to crap.”
Others worry that if the stock market remains this frothy, it will push the Fed to keep raising rates far more aggressively than investors expect: “The January melt-up in stocks will not last and the more exuberant the market gets, the more likely the Fed will be more aggressive with rate hikes,” said David Trainer, CEO of New Constructs, an investment research firm, in a report.
“Most investors don’t realize the Fed has to fight the inflation in the stock market, too,” Trainer added. “That means investors need to buy stocks with good fundamentals and real cash flows and sell the profitless, narrative-driven stocks that have dominated headlines over the past few years.”