Most of us have been asked at some point if we would jump off a bridge if all our friends did. Last week, the market demonstrated what happens when investors answer “yes.”
Stocks were quietly heading toward new highs Friday morning when Apple (ticker: AAPL), Alphabet (GOOGL), Facebook (FB), and other tech names suddenly fell. By the close, each had lost more than 3%, while the tech-heavy Nasdaq Co mposite had dropped 113.85 points, or 1.8%, to 6207.92. Stranger still, the S&P 500 declined by less than 0.1%, to 2431.77, while the Dow Jones Industrial Average rose 89.44 points, or 0.4%, to 21,271.97, a new all-time high. (The three benchmarks finished the week down 1.6%, down 0.3%, and up 0.3%, respectively.)
What sparked the tech wreck? Some market participants pointed to a Goldman Sachs report that circulated Friday highlighting an increase in “mean-reversion risk” for FAAMG stocks—a quintet of highflying names including Facebook, Amazon.com (AMZN), Apple, Microsoft (MSFT), and Google parent Alphabet. Then there was a report from noted short seller Andrew Left, of Citron Research, targeting chip maker Nvidia (NVDA), whose shares have surged 50% this year. Friday, they fell 6.5%, to $149.60.
More likely, the problem was love. Tech stocks have been the object of investors’ ardent affection for much of this year, to the exclusion of much else, and too much love can be a dangerous thing. At the end of May, three of the fourth most “crowded” large-cap industry groups hailed from the information-technology sector, according to Credit Suisse strategist Lori Calvasina, who tracks sell-side stock ratings, stocks overweighted in mutual funds, and hedge fund net exposure to find industries that appear over-owned. While tech stocks have attracted an abundance of buyers for a while, which has pushed prices up, Calvasina says she has noticed a change in the tone of conversations around the group. “People have been getting more concerned” about the stocks’ popularity and valuations, she says.
Calvasina downplays the risk, however, that large-cap tech prices will reach bubble proportions, as happened in the year leading up to the 2000 dot-com crash. The reason: Tech is nowhere near as expensive as it was at the 2000 peak. In fact, it isn’t even as expensive as the health-care sector was in 2015, when she lowered her health-care rating to Sell from Neutral. “You don’t have a valuation problem,” she says of tech.
Even as investors dumped the FAAMGs and their cousins, they were snapping up financial and energy shares, which helps to explain the Dow’s and S&P’s seeming obliviousness to the carnage next door. The S&P 500 Financial Index rose 1.9%, while the S&P 500 Energy Sector climbed 2.5%. Financials and energy have gone begging for love this year; they have been two of the worst performers. “A lot of stocks were being looked over,” says Rhino Trading Partners Chief Strategist Michael Block. “You see how everyone is positioned and go the other way.”
The banks also benefited, following former FBI Director James Comey’s testimony on Thursday, from a sense that President Donald Trump’s policy goals might not be dead on arrival after all, a point driven home when the House of Representatives passed a bill that would roll back many of the financial regulations passed in the wake of the financial crisis, says Jason Ware, chief investment officer at Albion Financial Group. He says that banks would also benefit if longer-term bond yields start to rise relative to short-term rates. This is known as a steepening yield curve.
Whether that happens could have much to do with the Federal Reserve’s decision on interest rates at its monetary-policy meeting this week. Financial stocks are among the bigger beneficiaries of higher interest rates, especially when longer-term Treasury yields rise with them. The Fed is widely expected to raise rates another quarter of a percentage point on Wednesday. If Fed chief Janet Yellen can pull off a hike and convince markets that the U.S. economy is still growing steadily, Friday’s tech wreck could be just a hiccup on the way to higher stock markets.
(Source: Barrons Online)