Estimated read time: 3 minutes
Publication date: 8th May 2022 22:21 GMT+1
The tech-heavy Nasdaq Composite index fell by 5% yesterday which erased a rally from the previous session in a reversal that stunned investors in what was one of the worst trading sessions since the onset of COVID-19.
The Dow Jones Industrial Average lost over 1,000 points or 3.1% while the S&P 500 index fell 3.56% as well. The Nasdaq Composite index is now trading at 12,317.69 which is its lowest level since November 2020.
In an interview with CNBC, Randy Frederick, the managing director of trading and derivatives at the Schwab Center for Financial Research explained, “If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff. ... But having the kind of day we had yesterday and then seeing it 100% reversed within half a day is just truly extraordinary.”
Several tech stocks saw a massive decline in share prices as Meta Platforms (NASDAQ: FB) and Amazon (NASDAQ: AMZN) fell 6.8% and 7.6% respectively. E-commerce stocks such as Etsy (NASDAQ: ETSY), eBay (NASDAQ: EBAY), and Shopify (NASDAQ: SHOP) also slumped by 16.8%, 11.7%, and 15% respectively on May 5.
Interest rates continue to weigh heavily on the market
The 10-year Treasury yield moved over 3% which was the highest level in four years. An uptick in interest rates has acted as a key catalyst for the sell-off in growth stocks as it increases the cost of debt which negatively impacts profit margins over time. Further, higher interest rates also make lower-risk assets such as bonds more attractive resulting in an accelerated shift of capital.
Earlier this week, the Federal Reserve increased benchmark interest rates by 50 basis points, which was the largest hike since 2000. The central bank also emphasized it will begin reducing its balance sheet in June.
Its quite evident that the Fed will continue to raise benchmark rates to offset higher inflation rates and rising commodity prices, which means investors should brace for volatility in the next few months. So, where should investors park their funds right now?
Buy inflation-proof stocks such as Lowe’s
In a sluggish macro-environment, it makes sense to bet on companies with diversified businesses or with enough pricing power. One such company is retail giant Lowe’s (NYSE: LOW) which is involved in the home improvement vertical. Shares of Lowe’s have returned over 130% to investors while currently offering a forward yield of 1.6%.
Home improvement spending in the U.S. has surged from $358 billion in 2016 to $538 billion in 2021 and might touch $621 billion by 2025, providing the company with enough room to improve its top line.
In 2021, Lowe’s reported revenue of $96.25 billion and adjusted earnings of $12.04 per share. Despite its market-beating gains, the stock is valued at 1.3 times forward sales and a price to earnings multiple of 14.5x. Comparatively, its earnings are forecast to rise at an annual rate of 14.5% in the next five years.
Another stock that should be part of your watchlist is Brookfield Infrastructure (NYSE: BIP) which offers investors a tasty yield of 3.6%. Brookfield Infrastructure has over $74 billion in assets and is involved in businesses such as midstream, transport, and utilities.
The company has already identified $900 million in investment opportunities in the utilities segment which should allow it to grow EBITDA by 9% annually through 2026. Its capital expenditures of $950 million in the transport business should expand EBITDA between 12% and 15% annually in this period.
Brookfield Infrastructure stock has returned 18% in dividend-adjusted returns to investors on an annual basis since 2008, easily outpacing the broader markets. It remains a top pick right now for those looking to derive outsized gains in 2022 and beyond.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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