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DESPITE A SHAKY START, DATATREK STICKING WITH TECH

Investors have been rattled by recent volatility which has seen the tech-laden Nasdaq Composite .IXIC confirm it's in a correction from its mid-December record close. This has them re-considering just what return expectations may be reasonable for the year.

Jessica Rabe, co-founder of DataTrek Research, is noting that the Nasdaq just had two straight years of strong gains (price returns of 43%/29% in 2023/2024). With this, she has some thought on whether this year's pullback (-7%) is just a typical reversion to the mean.

Using data back to 1972, Rabe says that the most common duration of a bull market in the Nasdaq composite, defined as one or more years of positive price returns after a down year, is two years. She brings this up because strong returns over the past two years came after an awful 2022 (price return of -33%).

She adds that two years of consecutive index gains is the most frequent observation after a down year, occurring four times since 1972. The next most common outcomes have been either three, five or six years, at two instances each.

Therefore, overall, and prior to the current cycle, Rabe says history shows it’s more common for the Nasdaq to rally for 3–6 straight years than 2 years after a down year.

Rabe notes that in four instances of loss-making Year 3s, three were due to an economic or geopolitical shock and one was the result of a confluence of factors: 1984 (high interest rates, fears of recession and inflation potentially reemerging, and valuation concerns after strong gains in 82 and 83), 1987 (market structure related issues causing the October crash), 1990 (Iraq invasion of Kuwait which spiked oil prices), and 2011 (Greek debt crisis).

After examining the data, Rabe says that as long as the U.S. does not experience an economic or geopolitical shock, history says it is reasonable to expect a 10% gain for the Nasdaq composite this year.

She notes that the Nasdaq has been up double digits during Year 3 of a bull market run almost half (40%) of the time.

Therefore, DataTrek's view is that "given a decent labor market, still growing US economy, Fed rate cutting cycle, and the tailwinds of disruptive innovation like gen AI, we’re still bullish on US large cap Tech this year despite a shaky start."

(Terence Gabriel)

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