Since mid-February, the stock market has undergone a change of character. Many high-multiple stocks which were among the biggest winners since the rally started in 2020 - have undergone deep corrections of between 30% and 45%. A big catalyst was the rise in long-term rates which puts pressure on high-multiple stocks.
Therefore, it's not surprising that out of the major averages, the Nasdaq
A Healthy Development
Ultimately, this was a healthy development for the bull market's longevity. Frothy and overheating markets cannot be sustained indefinitely. And, when they tumble, it can lead to severe market dislocations especially if there are no offsetting inflows. Overall, it's constructive that the overall market was able to absorb selling in these parts of the market.
The correction in these pockets of the market most negatively affected retail traders and traders or funds who were deploying excessive leverage. All in all, the S&P 500
This increases the odds of the economy returning to normal. It also means that the leisure and hospitality, restaurants, and services part of the economy should return to normal by the end of the year which would mean that nearly every segment of the economy would be in expansionary mode.
What's Next?
Sometimes, a really strong economic report would automatically translate into the Federal Reserve becoming more hawkish thus leading to a "sell the news" type of reaction. However, this is unlikely at the current time given the Fed's insistence that it will look past the first wave of inflation and focus more on its average level rather than headline prints.
Certainly, this stance may be tested sooner than expected. However, in the near-term, it means that investors should remain bullish. Low rates and earnings growth should translate into new highs for all the major averages, including the lagging Nasdaq and Russell 2000, over the next month.