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

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The Nasdaq Composite and the S&P 500’s tech sector declined sharply at the start of the year, but strategists say it may not be the fate of other groups or the broader market.

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The tech-heavy Nasdaq sold out early Monday, falling nearly 10% from its all-time high in the worst of the decline. Big cap techs such as Apple, Microsoft and Alphabet were all sharply lower, but trimmed their losses and helped the Nasdaq reversal dramatically into positive territory at the end of the day.

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“I think this is a violent and unpleasant re-evaluation, but I don’t think it will end the year,” said Lori Calvasina, head of US equity strategist at RBC. “I would say I am still in the broad market bearish range of any sort, which would be in the 5% to 10% range as opposed to 10% to 20%. 10% to 20% would be afraid of growth, and I would not. Looks like we are in fear of growth.”

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As technology declines, value stocks and cyclical sectors have outperformed. For example, financial stocks, helped by rising rates, were up 5% from the start of the year, while S&P Tech stocks were down 4.6%.

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The Nasdaq ended the session up 0.05% at 14,942.83 on Monday. The S&P 500 closed down 0.1% on Monday at 4,670.29. The broad-market index is down 2% so far for the year.

A valuation reset for the Nasdaq

“For the Nasdaq, this is a valuation reset,” Calvasina said. “For the most part, it’s a reaction to the monetary background. It’s not a fear of growth. For the market to really slide down in a significant and sustainable way, you really need to ask investors whether the economy is in recession. Taking a risk.”

The Nasdaq temporarily plunged below its 200-day moving average on Monday, causing panic among investors. That level is the average of the close of the previous 200 session and is seen as an important momentum range.

“I think a lot of it is technical,” said Peter Bokvar, chief investment officer at Blakely Global Advisors. “The Nasdaq hit its 200-day. It took a lot of people out, and then it went down. Buying on downsides on these key moving averages has worked in the past.”

But Bokvar said the sell-off was not over. “We’re just getting started. The Fed is tightening up. To think it’s going to end in six trading days of the new year would be wrong.”

Since the beginning of the year, there has been a sharp jump in the Treasury yield in the stock market. In the last hour of trading of 2021, the 10-year Treasury was yielding 1.51%. On Monday afternoon, the benchmark yield was above 1.8%, but then slipped to 1.76%. Tech stocks rose as yields plummeted.

Bond strategists expect the 10-year yield, which moves to the opposite price, to continue rising toward 2%, saying the move is based on expectations of the Federal Reserve raising interest rates, they also say. That’s because the Kovid Omicron version doesn’t seem like it. The economy will suffer huge losses.

“They are [investors] Baking in a more aggressive Fed, but they’re still saying GDP is running at 3.9%. This is well above average. When GDP is trending near or below that, you see growth versus value. Now that we have cyclical growth, you don’t have to buy secular growth,” Calvasina said.

Tech and growth stocks, which are the most valuable, are therefore disproportionately hurt by the high returns. Investors are willing to pay for technology and high-flyers for the promise of future growth. When the Fed takes out cheap money, those types of stocks tend to look more expensive.

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“At tech companies, there’s nothing wrong with fundamentals, and their earnings revisions are stronger than in other sectors. I don’t think that’s the end of tech investing,” Calvasina said. He said the only thing wrong with these companies is their high valuations.

Fed worries?

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

“I think the market is bullish in terms of its concerns about the Fed,” said Sam Stovall, chief investment strategist at CFRA Research. “Is the Fed really going to go all the way down until March, start raising interest rates in March and then start shrinking your balance sheet at the same time? I think the Fed’s going to make an adjustment, then pulse.” to see how the economy reacts to that adjustment.”

Stovall said there are a number of reasons why the market can no longer sell across the board. The Nasdaq may suffer further losses, but it doesn’t expect the S&P 500 to improve. One reason is that funds go into retirement plans at this time of year, and many investors have cash ready to invest as prices drop.

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

Stovall noted that the fourth quarter of 2022 and the first quarter of 2023 will historically be the best-performing quarters of the four-year presidential cycle. Meanwhile, the second and third quarters marked an average decline since World War II, due to the uncertainty of midterm elections.

Adam Parker, founder of Trivariate Research, said Monday’s return to the Nasdaq was encouraging.

“I see this as an opportunity to be more optimistic, and I am optimistic,” Parker said.

“I think there are individual securities that will still depreciate a lot as they become more valuable, whether they are work-from-home locations where there is really no technological move, or software companies that are not generating real profits. for a long time,” Parker said. “It’s kind of junior university to say that all these things are useless because rates are going up. Businesses that are partially exempt, you’ll like them more now.”

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