Wall Street: Worst performing stocks in 2022 now lead 2023 gains

Stocks ended lower on Monday (30), after a solid recovery last week. Investors may be on edge ahead of this week’s big Federal Reserve meeting, a flurry of profits from major tech companies on quarterly earnings and the US jobs report due out on Friday.

The Dow fell more than 260 points, or 0.8%, while the S&P 500 and Nasdaq fell 1.3% and 2%. Still, it’s still been a solid start to the year for the market — and many of last year’s losers have led the way on Wall Street so far in January.

The communications sector, with its many hard-hit tech and media companies, is the best-performing market group so far in 2023: it’s up nearly 10%, according to data from S&P Global Market Intelligence. It was the worst performing sector in 2022, falling 40%.

the owner of CNN , Warner Bros. Discovery, which fell nearly 60% last year, is up more than 50% so far in 2023 and is the top performer in the S&P 500.

Several other media companies, old and new, have also had a resurgence this month. Paramount, which owns CBS, rose 35%. Disney raised about 25%.

Netflix gained more than 20%. Shares in Meta Platforms, which own Facebook and Instagram, also rose more than 20%.

Consumer discretionary stocks, which include many retailers and automakers, have also seen an impressive recovery from last year’s slump. The sector was the second worst performer in 2022, with a loss of around 38%.

Just look at Tesla. Elon Musk’s electric vehicle giant is up more than 35%. It has also had a miserable 2022, losing nearly two-thirds of its value over the past year.

Investors appear to be buying into hopes that the Fed will continue to reduce the size of its rate hikes after several historically large hikes last year and possibly even a pause later this year.

Increasingly, the feeling is that the economy may end up heading towards a so-called soft landing: a slowdown, but not a full-blown recession.

Those hopes spurred other consumer stocks. Amazon is up about 20% this year. Cruise line owners Carnival, Royal Caribbean and Norwegian are among the top performers in the S&P 500. So are casino stocks Caesars, Wynn, Las Vegas Sands and MGM.

Blisters?

Still, some investors are concerned that this year’s market rally is eerily reminiscent of past market bubbles.

That’s because it’s not just quality companies that are winning. The resurgence is also clear in stock memes. GameStop is up nearly 15%. The AMC theater chain was up about 25%.

Cryptocurrency exchange Coinbase soared nearly 60% despite the collapse of rival FTX and Coinbase’s own announcement of mass layoffs. Coinbase was buoyed by a recovery in bitcoin prices.

Then there are companies like Bed Bath & Beyond and Carvana, both of which have seen solid earnings this year, although there are rumors of possible bankruptcy filings. Even as these companies avoid Chapter 11, it’s clear they’re in financial trouble.

“We’ve seen speculation come back to the fore,” said Steve Sosnick, chief strategist at Interactive Brokers, in a recent report. Sosnick, without mincing words, called the recovery of these types of companies a “flight to shit.”

Others worry that if the stock market continues to be so choppy, it will put pressure on the Fed to keep raising rates far more aggressively than investors expect.

“The January stock meltdown will not last and the more exuberant the market gets, the more likely the Fed will be more aggressive with rate hikes,” said David Trainer, CEO of New Constructs, an investment research firm, in a report.

“Most investors don’t realize that the Fed also needs to fight stock market inflation,” Trainer added. “That means investors need to buy stocks with good fundamentals and real cash flows and sell the non-profit, narrative-driven stocks that have dominated the headlines in recent years.”