The last week saw all major indices lose significant value as investors remain wary about macro-economic challenges that include inflation, geopolitical tensions, supply chain disruptions, steep valuations surrounding growth stocks, and tepid forecasts provided by corporates.

In the week ended on May 6, the S&ampP 500 index fell 0.2% while the NASDAQ Composite Index was down 1.5%. Comparatively, the Dow Jones index fell 0.24%. Right now, the S&ampP 500, Nasdaq Composite, and Dow Jones have slumped 13.9%, 23.3%, and 10.1% respectively year to date.

Several tech stocks have burnt massive investor wealth as rate hikes by the central bank and inflation worries coupled with a sluggish macro-environment are likely to impact consumer spending which has forced market participants to reassess their equity portfolios.

Last week, Shopify (NYSE: SHOP) fell 15% in a single trading session after it missed earnings and revenue estimates in Q1. Further, shares of ride-sharing company Lyft (NASDAQ: LYFT) plunged 36% after it provided weak guidance for Q2. Bill.com (NYSE: BILL) lost 30% in market cap on the back of allowing top-line growth while Cloudflare (NYSE: NET) sunk 24% after it forecast a loss in the June quarter.

 

The market mayhem is likely to continue

In an interview with CNBC, economist Brunello Rosa who is the CEO and head of research at Rosa & Roubini expects quantitative tightening measures will negatively impact economic activity. Rosa believes heavy selling in stock markets to gain momentum as global central banks will continue to hike base rates to offset inflation. Last week, the Fed raised base rates by 0.5% which is the largest hike since 2000.

Rosa explained, “Now it’s time for a reappreciation of the economic fundamentals around the world in terms of growth. It’s hard for markets to be totally optimistic when inflation is going up, growth is going down and interest rates are rising fast across the globe.”

The Bank of England which is the central bank of the U.K. also warned about a looming recession as the tightening of balance sheets by regulators will lead to a contraction in economic activity.

Rosa also emphasized the Russia-Ukraine war will last longer than anticipated adding to headwinds in supply chains and keeping commodity prices higher.

Investors will closely watch data for the consumer price index for April which will release on Wednesday as well as the producer price index which will publish on Thursday. Economists expect CPI in April to rise by 0.3% for April or 8.2% compared to the year-ago period.

Additionally, the 10-year Treasury yield also surged past 3% for the first time in almost four years. On Friday, the yield stood at 3.13%, up from 2.94% in the prior week.

 

Where do invest when S&ampP 500 is under pressure?

While the energy sector remains the top-performing one in the last year, oil and gas stocks are highly capital-intensive and cyclical. So, higher crude oil prices will boost profits but climbing interest rates will eat into profit margins as well. Additionally, if recession fears come true, there is a good chance for energy stocks to trade at far lower multiples next year.

Investors need to eliminate company-specific risk and purchase funds or ETFs which will diversify their overall portfolio. You also need to re-evaluate your holdings of growth stocks and increase exposure to value stocks in the near term. Investing in companies that are cheap and have pricing power may seem the ideal bet in a challenging market environment.

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