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Nasdaq 100 Outlook: Stock Market Rally Fizzles on Fed Monetary Policy Jitte

Nasdaq 100 Outlook: Stock Market Rally Fizzles on Fed Monetary Policy Jitte
The Nasdaq 100 Outlook: Stock Market Rally Fizzles on Fed Monetary Policy Jitte
In January, all major indices posted strong gains and are now trading at or above their 200-day simple moving averages. This positive market breadth was aided by optimistic investor sentiment, based on moderate inflation data and the assumption that the Federal Reserve would soon pull back from its rate hikes.

But the rally fizzled on Tuesday after an initial sell-off in growth stocks was met by a surge of buying in value names. The S&P 500 recovered from intra-day losses to close up 0.2%, snapping a five-day losing streak.

The big story for the Nasdaq 100 was a steep decline in the technology sector, particularly in the semiconductor chips segment. However, the index has bounced from the lows thanks to a bullish trend for the global economy.

On a macro basis, the US economy is likely to continue improving as the global pandemic continues to ease and supply chain issues subside. However, the Fed’s aggressive monetary policy is likely to keep prices low for some time.

So, as a result, we’re seeing a bit of a risk-off mood in equity markets, especially with the prospect of higher rates in 2023. But even then, the market is expected to remain on a long-term uptrend as the global economy improves.

A few key company reports will be released tomorrow, including the NASDAQ’s trifecta of tech leaders – Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL). They could determine whether or not the index keeps recovering from its drubbing in 2022 or goes backward again.

Several other factors should also support the recovery, including a continued improvement in the labor market, the removal of uncertainty about China’s trade policy, and declining energy prices. These factors should all help support the broader market in the coming weeks and months, but we’ll need to see more robust earnings to drive the markets.

We’ll also need to see if inflation can remain moderate while the Fed continues to raise rates and how that may impact the economy. That’s a crucial factor because ultimately the degree of inflation moderation, and how much damage will be inflicted on the economy to bring it down, will still have a significant impact on earnings, according to analysis from US investment bank Raymond James.

Historically, consecutive declines in the Nasdaq 100 are extremely rare. This is because it takes a lot to break the negative cycle and set up for a year of recovery. But given the fact that the Nasdaq has delivered an average return of 51% in the first positive year following a loss, there’s a good chance the index can make a green return this year.

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