What happened
The stock market is meandering to find its way to start 2023, and that's causing some strange moves. Software-as-a-service, or SaaS stocks, in particular, had a great start to the day, trading sharply higher, only to see valuations fall and even end up in negative territory.
Shares of Teladoc Health (TDOC 3.31%) jumped as much as 4.6% in early trading, only to fall to a 4.7% decline at 1:45 p.m. ET. Shopify (SHOP 4.90%) was up 5.1% at its peak, Block (SQ 5.04%) rose 7.4%, and HubSpot (HUBS 2.96%) rose 5.2%, but have all fallen to near breakeven at this writing.
So what
These stocks often trade in unison because they operate in similar SaaS markets. In 2022, that was terrible for investors, as interest rates rose and investors sold off high-growth stocks like these. But that changed early on today.
One reason is that interest rates are dropping on Tuesday. Over the last year, U.S.10-year government bond yields have increased 215 basis points to 3.78%, but today they're down 9 basis points. That may not seem like much, but any sign that rates are going down will help growth stocks.
Investors are also beginning to speculate on which companies and stocks will do well in 2023. We know last year was bad for SaaS stocks, but that caused a lot of companies to cut costs to focus on the bottom line and could lead to better margins and profitability in 2023, even if growth slows.
Specific to these companies, Shopify said it will open up services to enterprise customers as it looks for more growth. The company has long been a favorite of small businesses, but may be tapped out with those customers as it looks to diversify.
Shares of Block were upgraded from neutral to outperform at Robert W. Baird, with a price target of $78 per share. Analysts can move stocks in the short term, and this definitely helped in early trading.
Now what
It's not unusual for stocks to trade wildly around the holidays, and this is the first trading session many traders are back in the office. This means it took some time for the market to find its footing.
Investors are trying to position themselves for the upcoming year and quarterly reports that will begin in a couple of weeks. The economy seems to have remained strong in the fourth quarter of 2022, but many companies did start cutting back on both employees and software spending. It's not clear yet how that will impact these companies.
I think investors who are bullish on these companies long term should start looking at these companies as values. They're all leaders in their specific segment of the market, and if costs are reined in over the next few years, they could improve profitability very quickly. That's what will ultimately drive their stock performance, but it may be a volatile ride as companies execute on long-term growth plans.
