The National - Is this the beginning of a new bull market?

Investors love playing the old hits. They bought US technology stocks and cryptocurrencies on repeat during the stock market bull run of 2021, and can't bear to let them go now.

Former tech heroes Tesla, Meta Platforms (formerly known as Facebook), Amazon and Netflix went into meltdown last year, as did Bitcoin, Ether and the rest, in what many analysts saw as a long-term shift in sentiment and fortunes.

Both asset classes belonged to the pop-tastic era of endless fiscal and monetary stimulus, which died in last year's inflationary reality check. Yet, shockingly, they are now topping the investment charts again.

Electric car maker Tesla is off like a rocket this year and is up 75 per cent.

Meta has rebounded more than 50 per cent, Amazon is up 30 per cent and Netflix has gained 25 per cent.

Meanwhile, the Nasdaq has jumped 18 per cent and the S&P 500 is up 10 per cent.

Bitcoin also started 2023 with a bullet, climbing more than 40 per cent in 2023 to top $23,500 early this month. Ether and Dogecoin are close behind, as cryptocurrencies make an even more unlikely comeback.

Even meme stocks are on the mend. Remember AMC Entertainment? It is up 55 per cent this year. GameStop? Up roughly a third.

There were indications this could happen last summer, when technology stocks and cryptocurrency prices started to sing during the short-lived bear market rally.

So, are investors taking one final trip on the nostalgia circuit or does this year’s risk-on recovery have staying power?

2023 is shaping up to be the opposite of last year, for better and for worse, says Ben Laidler, global market strategist at trading platform eToro.

Technology stocks and cryptocurrencies were hit hardest by last year’s inflationary storm, with Bitcoin down 65 per cent and the Nasdaq crashing 33 per cent.

They are now leading the relief rally and this is not simply based on wishful thinking, Mr Laidler says.

“US inflation has been falling for six months and the US Federal Reserve is within a whisker of stopping its dramatic rate hiking cycle, which is coming as a huge relief to stressed investors.”

Investors should not get too carried away because we have not reached the sunlit uplands yet.

“The US economy is set to grow just 1.4 per cent this year, with zero profit growth on the S&P 500,” Mr Laidler says.

Private investors saw the rebound coming, with eToro surveys showing twice as many buying than selling in the final quarter of 2022.

Their favoured asset classes? Cryptocurrencies and technology stocks.

Investors are embracing risk again as inflation and interest expectations peak, but they are at risk of becoming complacent, says Vijay Valecha, chief investment officer at Century Financial.

“They are understandably enjoying the joyride after a rough year but should err on the side of caution.”

We now live in a very different world, as the Fed funds rate has climbed from a range of 0.25 per cent to 0.5 per cent last March to 4.5 per cent to 4.75 per cent today.

Markets expect two more rate increases and this means that early stage growth companies can no longer borrow money at rock-bottom rates based on the promise of profits tomorrow.

“Investors now assign more value to good-quality companies with a sound rationale and strong income prospects today,” Mr Valecha says.

Cryptocurrencies remain a “high-risk and speculative asset class”, while some US tech hopefuls are now classified as penny stocks after last year’s falls, he says.

“Investors should stick to good-quality names and not try to catch falling knives or make outsize bets on futuristic or niche technologies.”

Some risk is good but do not overdo it as a hawkish word from the Fed could dampen sentiment overnight, Mr Valecha adds.

Tech giants Apple, Amazon and Google-owner Alphabet delivered a check to bullish sentiment last week, as their earnings “disappointed in their own separate ways”, says Chris Beauchamp, chief market analyst at trading platform IG Group.

“Despite this, risk appetite seems to be solid and US equities have started to join in on the global rally amid hopes for a more upbeat performance next time.”

Others are even more optimistic, including Yves Bonzon, group chief investment officer at Julius Baer, who boldly states that we are now witnessing “a new bull cycle, not a bear rally”.

From a technical point of view, the rally is healthy, with broad participation across the index components, Mr Bonzon says.

“We have been saying for several months now that the bottom of the 2022 bear market was in October. We are not in a counter-trend rally but a new bull cycle.”

Naturally, there are still threats, such as a Covid-19 resurgence and war in Ukraine, but as inflation falls, markets should rise.

Everything now rests on the speed of what Mr Bonzon calls “disinflation” and how central banks respond.

In the US, the Fed has almost finished its work but does not want to signal a premature pause, while the European Central Bank is at risk of overdoing it and should resist “embarking on a path of excessive tightening that can only lead to another embarrassing reversal”, Mr Bonzon says.

Samuel Fuller, director of Financial Markets Online, says investors are now anxiously trying to second guess the Fed’s next move.

“Some market watchers are predicting interest rates could soon peak at 4.95 per cent. Ordinarily, all this would give a fillip to US equities but so far, markets have been whipsawing because of the ambivalent signals accompanying the Fed’s decision,” he says.

“This has left both the US dollar and stock markets in limbo as traders scramble to decode which of the contradictory signals to believe.”

Markets are likely to pause after their recent strong run, but investors who are too cautious risk making a classic mistake. History shows that the biggest returns are made in the early stages of a bull market.

As recent events have shown, when investors get their mojo back, we are likely to find them singing the same tunes as before.