Tumult in tech shares hurts for now, however could not result in broader correction

Tumult in tech stocks hurts for now, but may not lead to broader correction

A dealer in a face masks works on the buying and selling flooring on the New York Inventory Alternate (NYSE) because the Omicron coronavirus variant continues to unfold in Manhattan, New York Metropolis, U.S., December 20, 2021.

Andrew Kelly | Reuters

The Nasdaq Composite and the tech sector of the S&P 500 slid sharply to start the yr, however strategists say that might not be the destiny of different teams or the broader market.

The tech-heavy Nasdaq offered off laborious early Monday, falling roughly 10% from its all-time excessive throughout the worst of the decline. Large cap tech, like Apple, Microsoft and Alphabet had been all sharply decrease however curtailed their losses and helped the Nasdaq stage a dramatic reversal into optimistic territory close to the top of the day.

“I feel it is violent and unsightly repricing, however I do not suppose it would find yourself derailing the yr,” stated Lori Calvasina, head of U.S. fairness strategist at RBC. “I might say I am nonetheless throughout the class of any type of broader market downturn could be within the 5% to 10% vary, versus 10% to twenty%. 10% to twenty% could be a development scare, and I do not suppose we’re in a development scare.”

As tech has fallen, worth shares and cyclical sectors have performed higher. As an example, monetary shares, helped by rising charges, had been up 5% because the begin of the yr, whereas S&P tech shares had been down 4.6%.

The Nasdaq ended Monday at 14,942.83, up 0.05% on the session. The S&P 500 ended at 4,670.29, off 0.1% Monday. The broad-market index is down 2% for the yr to date.

A valuation reset for the Nasdaq

“For Nasdaq, it is a valuation reset,” stated Calvasina. “For probably the most half, it is a response to the financial backdrop .This isn’t a development scare. To essentially knock the market down in a big and lasting method, it’s good to actually have traders query whether or not the financial system is risking recession.”

The Nasdaq fell below its 200-day moving average temporarily Monday, spooking investors. That level is the average of the last 200 session closes and is seen as a key momentum threshold.

“I think a lot of this is technical,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “The Nasdaq got to its 200-day. That flushed a lot of people out, and then it bottomed. Buying on the dip at these key moving averages has worked in the past.”

But Boockvar said the sell-off is not over. “We’re just beginning. The Fed is tightening. To think it’s going to end in six trading days of the new year is going to be misplaced,” he said.

The stock market has been rattled by a sharp jump in Treasury yields since the beginning of the year. In the final hour of 2021 trading, the 10-year Treasury was yielding 1.51%. On Monday afternoon, this benchmark yield topped 1.8%, but then slipped back to 1.76%. Tech stocks recovered as yields dropped.

Bond strategists expect the 10-year yield, which moves opposite price, to keep heading toward 2% They say the move is based on expectations for Federal Reserve to hike interest rates, they also say it’s because the Covid omicron variant does not seem like it will severely harm the economy.

“They’re [investors] baking in a more aggressive Fed, but they’re still saying GDP is running at 3.9%. That’s way above average. When GDP trends down to about or below trend, you see growth up versus value. Now we have cyclical growth, you don’t have to buy secular growth,” Calvasina said.

Tech and growth stocks, which are most highly valued, are therefore disproportionately hurt by higher yields. Investors are willing to pay up for tech and high-fliers for the promise of future growth. When the Fed takes away cheap money, those types of stocks look more expensive.

“On tech companies, there’s nothing wrong with the fundamentals, and their earnings revisions are strong versus other sectors. I don’t think this is the end of tech investing,” Calvasina said. The only thing that’s wrong with these companies is their lofty valuations, she said.

Fed worries overblown?

The Fed last week issued minutes from December meeting that reinforced its goal of reducing its bond purchases quickly and raising interest rates. The central bank also said it was looking to reduce accommodation by reducing the size of its nearly $9 trillion balance sheet.

“I’m sort of feeling the market is getting overblown, in terms of its worry about the Fed,” said Sam Stovall, chief investment strategist at CFRA Research. “Is the Fed really going to taper entirely by March, start to raise interest rates in March and then start to reduce its balance sheet at the same time? I think the Fed is going to make an adjustment, then keeps its finger on the pulse to see how the economy reacts to that adjustment.”

Stovall said there are plenty of reasons why the market may not sell off across the board now. The Nasdaq could see further losses, but he does not expect the S&P 500 to go into a correction. One reason is that funds go into retirement plans at this time of year, and many investors have cash ready to invest as prices fall.

“It’s the expensive stocks that are likely to get hit harder. Certainly, on a relative basis, I think value will outperform growth, not only now but this year because of the interest rate uncertainty ahead, at least through the third quarter,” he said.

Stovall noted that the fourth quarter of 2022 and the first quarter of 2023 would historically be the best performing quarters of the four-year presidential cycle. Meanwhile, the second and third quarters have posted average declines since World War II, due to the uncertainty of approaching mid-term elections.

Trivariate Research founder Adam Parker said the Nasdaq’s comeback Monday was encouraging.

“I do sees this as an opportunity to get more optimistic, and I am optimistic,” said Parker.

“I think there are individual securities that will still go much lower because they got overvalued, whether they’re work-from-home places that don’t really have a technology move, or software companies that aren’t going to generate real profits for a long time,” Parker said. “It’s kind of junior varsity to say all these things are worthless because rates are rising. Those businesses that have been partially discounted, you’ve got to like them more now.”

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