Investors saw signs of a “healthy” correction in the US equity market this week after sudden falls struck some of the technology stocks that have powered the record-breaking rally.
On Thursday, America’s biggest listed companies suffered their worst one-day drops since March, when the Covid-19 pandemic tore through global capital markets. Apple slid 8 per cent, wiping $150bn from its market capitalisation — roughly equivalent to the value of McDonald’s — while electric carmaker Tesla, which has come to symbolise the heady optimism of the new generation of retail investors, dropped 9 per cent.
The selling dragged the tech-heavy Nasdaq 100 index down 3.1 for the week, the worst for the benchmark since the Covid-19 sell-off in March, while the broader S&P 500 index of blue-chips dropped 2.3 per cent — its steepest weekly fall since June.
The drop was “a healthy skimming off the top”, said Alicia Levine, director of market strategy for BNY Mellon Investment Management, on Thursday’s fall. “It doesn’t feel very good if you’re over-levered to tech, but this is a healthy correction.” The Nasdaq 100 is still up nearly 33 per cent this year.
Big tech stocks had “drifted away” from normality, said Gregory Perdon, co-chief investment officer of private bank Arbuthnot Latham, speaking before tech stocks turned south. He pointed to voracious buying of Tesla, which is still up fivefold this year.
“No professional allocator is now allocating fresh capital to Tesla,” said Mr Perdon. “There’s definitely speculators doing it, but it’s no longer in the realm of normalcy.”
In July, Tesla overtook Toyota to become the world’s most valuable carmaker, and has pushed on since. “It’s mad and it’s getting madder,” said Kasper Elmgreen, chief investment officer for equities at Amundi, Europe’s largest fund manager, speaking earlier this week. “Gravity is a force that will come at some point.”
The exuberance is reflected in the options market, where trading volumes in derivatives attached to big tech stocks have soared. Activity in call options — effectively bets that a given stock price will rise — has reached triple normal levels and now well exceeds that of put options, which are bets the other way.
Large purchases of calls were putting pressure on those taking the other side of the trade to hedge their exposure to rising prices by buying stock, analysts said — a “vicious circle” that was driving valuations higher. Japanese conglomerate SoftBank has been a big buyer of these derivatives, according to people familiar with the matter.
Large derivative bets have left traders bracing for wild swings in tech stocks. This week, anticipated volatility for the Nasdaq 100 reached its highest level, relative to the S&P 500, in 16 years.
Another sign of giddiness was a rush by retail investors to buy shares in Apple and Tesla after the two companies completed stock splits on Monday, confounding professional investors. “That does not create any economic value. We all know that,” said David Older, head of equities at Carmignac. “It’s an indication that there are some signs of irrational exuberance, absolutely.”
Still, Mr Older and others said the basic rationale for owning equities still holds, pointing to a precipitous slide in inflation-adjusted interest rates. The real yield on 10-year US Treasuries — which measures the return bond investors’ can expect once movements in consumer prices are taken into account — is already below minus 1 per cent, and took another leg down this week as the market adjusted to the Federal Reserve’s recent announcement of a higher threshold for raising policy rates. Those expected losses after inflation have increased the appeal of holding riskier instruments, analysts say.
“The Fed is telling investors it is OK to invest in risky assets,” said Andrew Slimmon, senior portfolio manager for Morgan Stanley Investment Management.
Kristina Hooper, chief global market strategist for Invesco, thinks the reasons for tech stocks to outperform are still there. The effects of loose monetary policy have been compounded by the boost to tech giants such as Apple and Google — and newer players like Zoom Video — from more people working from home during the crisis. “So much of what is benefiting from the pandemic environment is in the tech space,” she said.
A sudden deterioration in the real economy could change this picture. Charles Evans, president of the Federal Reserve Bank of Chicago, said this week that the US recovery from the coronavirus shock would depend on “substantial additional support” from lawmakers to avoid a big drop in consumer spending or a rise in business collapses.
Whatever happens on Capitol Hill, some fund managers think a natural rebalancing is taking place. Quincy Krosby, chief market strategist for Prudential Financial, said the rally had become “overbought and extended” as investors jumped on the tech bandwagon, adding: “It’s painful but this was needed.”
https://news.google.com/__i/rss/rd/articles/CBMiP2h0dHBzOi8vd3d3LmZ0LmNvbS9jb250ZW50LzhjYTFmOTExLWY0NGMtNDkzZC1hMDczLWU4NDNjNjkxNTk4NdIBP2h0dHBzOi8vYW1wLmZ0LmNvbS9jb250ZW50LzhjYTFmOTExLWY0NGMtNDkzZC1hMDczLWU4NDNjNjkxNTk4NQ?oc=5
2020-09-04 21:38:00Z
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