The tech heavy NASDAQ racked up another record on July 13, hitting an intra-day high of 14,803.68, juiced by a positive start to earnings season and fears that the Federal Reserve will tighten its generous monetary policy on the backburner. The big question is, what will the NASDAQ do in the back half of 2021?
Will The NASDAQ Hit New Record Highs?
The NASDAQ has been on a blistering run after bottoming in March 2020. Despite the early 2020 stock market crash, the NASDAQ still managed to surge approximately 43%. That momentum has carried into 2021 with the NASDAQ up an additional 12.0%. From its March 2020 low to its July 13 peak, the NASDAQ has exploded more than 123%.
After its remarkable turnaround in 2020, no one expects the NASDAQ to repeat its 43% gains in 2021. But with investor optimism high, positive economic data coming in, and a strong start to earnings season, investors are certainly bullish on the NASDAQ’s outlook for the remainder of the year.
Before 2020, the NASDAQ posted four years of gains in excess of 40%. Since its debut in 1972, the best year after a 40%-plus surge on the NASDAQ was in 2010, when it advanced 16.9%. That record certainly seems in reach.
In addition to positive economic data and strong earnings, investors could lift the NASDAQ to even higher levels if they think the Federal Reserve is going to hold off on raising its key lending rate.
Despite the successful roll-out of the coronavirus vaccine, the number of new COVID-19 cases continues to rise, driven higher by the highly contagious Delta variant. The last thing the Federal Reserve is going to want to do is taper its stimulus during an ongoing pandemic, even if the economy is recovering quickly.
The Federal Reserve has pledged to keep its ultra-low lending rate in place to help the U.S. economy recover from the COVID-19 recession, despite inflation running at its highest level in 13-years.
In May, U.S. inflation rose 5% year-over-year—the biggest jump since the 5.3% increase in August 2008. Not be to be outdone, in June, U.S. inflation hit a 13-year high of 5.4%.
Because the Federal Reserve believes sky-high inflation is temporary, it believes there is no need to raise its rates. But the longer higher-than-expected inflationary numbers roll in, the harder it will be for the Federal Reserve hold off on tapering.
And we’ve already seen this year what can happen to a stock market rally when investors think the Fed is going to cut back its monetary policies sooner than planned. Treasury yields raced higher during the first quarter as investors bet on hawkish moves by the Federal Reserve.
This in turn saw investors and fund managers sell their tech stocks, which thrive in a low interest rate environment, and move into value stocks, which do well during an economic recovery. The NASDAQ responded by tumbling more than 8%.
As we have seen though, the NASDAQ has since recovered and gone on to record levels. Investors shouldn’t get complacent though. To gauge the health of the NASDAQ over the coming months, investors need to pay close attention to earnings, inflationary data, and what the Federal Reserve says.
The one positive to tapering stimulus and rising yields could be a short-term selloff on the NASDAQ, which could open the window of opportunity for unjustly punished tech stocks.
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