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Here’s Why Nasdaq is Not Done with Hitting Record Highs | gt.io
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Date:
15th Sep 2020
Author:
gt.io

Here’s Why Nasdaq is Not Done with Hitting Record Highs

In June 2020, Nasdaq, the tech-heavy US stock index, became the first of the major Wall Street indices to recover from its coronavirus-led losses. By July 21, it had soared to its highest in 3 months, pushing its price momentum to the highest in 2 decades. With huge gains in popular high-performing tech stocks, commonly known as the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), Nasdaq is almost 60% higher on a yearly basis, despite the rise in Covid-19 cases across the US. In August alone, the Nasdaq gained 9.6%, its best monthly gain since 2000.

The benchmark index was well above 12,000 points, as of September 3, with huge gains in tech stocks, not seen since the dot-com era. Continued support for technology, during these times of minimal social contact, is likely to add more fuel to Nasdaq in the coming months. The low interest rate environment will also play a role. 

If you are trading forex or bitcoin, diversification into tech stocks could be a good strategy right now. Let’s take a look at why the Nasdaq is poised for a future rally.
 
The Nasdaq houses some of the biggest technology companies like Apple Inc., Netflix Inc., Amazon.com and Zoom Video Communications Inc. These companies have suffered minimal damage due to the pandemic lockdowns, benefitting from it instead. As the coronavirus cases continue to surge across the world, people are resorting to technology to communicate, collaborate, be entertained, shop online and work remotely.

Not surprisingly then that tech stock values have increased tremendously. On August 31, 2020, Apple soared 4%, as analysts hiked price targets on the company. Zoom Video shares soared 40.8%, after it increased its fiscal year guidance, exceeding expectations. The company’s fiscal second quarter earnings quadrupled from the 2019 levels, leading to an increase in market cap from $25 billion in 2019 to $129 billion in August 2020. Tesla shares jumped 8.5%, up a whopping 450% since its March lows.

Apart from the reliance on technology, the low interest rate environment is also a factor behind this increased demand for tech stocks.
 
The US Federal Reserve recently presented its changed stance regarding average inflation targeting. For now, it looks as though the low interest rate environment will continue for a long time, which would be positive for the stock market. When interest rates fall, other forms of investments, such as currencies and bonds, become less appealing, pushing investors towards riskier assets, like stocks. Higher demand for stocks influences capital inflows to the equity market, pushing stock prices higher.

The technology sector, in particular, benefits from a dovish environment. Tech stocks usually carry less debt than economically sensitive stocks like manufacturing, mining and energy. They also do not rely solely on domestic consumption. So, when investors find it hard to see growth in other sectors, tech stocks become appealing.

With the rising Covid-19 cases in the US, economic recovery projections are grim. Plus, earnings estimates are being cut and rising fiscal deficits and low interest rates are pushing the US Dollar downwards. In such a climate, bitcoin and forex traders could concentrate on companies which are expected to grow, irrespective of the economic situation. This is a strong reason why the Nasdaq could continue to rise.

However, some investors are also concerned about the soaring valuations of some tech companies, considering that they have grown so much in a short period of time. The CBOE volatility index (VIX) remained higher than its historical average of 19.40 for a period of 131 days, till the end of August. Such a long period of elevated levels usually precedes big stock market sell offs.

Whether trading bitcoin, forex or stocks, risk management practices are essential in this Covid-19 induced market climate.