Tech stocks kept cratering Tuesday and there were two main concerns for the rest of the market.
The S&P 500 fell 2.78%, pulled down harshly by the technology components of the Nasdaq 100, which fell 4.11%. As expectations for a continued speedy economic recovery remain highly skeptical, the 10-Year Treasury yield slipped to 0.68%. The price of crude oil fell 7.24% to $36.89 a barrel.
For tech, valuations are still stretched. Apple (AAPL) - Get Apple Inc. (AAPL) Report fell 6.7%, while Tesla (TSLA) - Get Tesla Inc Report fell 21%. Not only was growth tech selling off as investors reassessed valuations in the face of what could have potentially been a massive pull-forward of demand for at-home services like streaming, cloud and e-commerce, but Tesla had two additional headwinds.
Tesla will not be added to the S&P 500, which means indexed funds won’t buy the shares. Also, electric vehicle competitor Nikola (NKLA) - Get Nikola Corp. Report completed a deal with General Motors (GM) - Get General Motors Company (GM) Report which will give Nikola access to its EV technology in exchange for a small equity stake. This is a “game changer” for Nikola, according to a note from Wedbush Securities' analyst Dan Ives, and a headwind to Tesla. Nikola rose 40%.
As for highly economically-sensitive value stocks, the sell-off was real as well. As the yield curve compressed, bank stocks fell about 3.5%. Large cap oil stocks fell 3.67%.
First off, Congress is meeting again to discuss fiscal stimulus, which the economy — still not fully reopened — needs, especially as interest rates are near rock bottom. Some reports say the new bill could be about $500 billion, far less than other bills passed earlier this year.
Secondly, President Trump did threaten to put more tariffs on Chinese goods coming into the U.S., which would raise prices and hurt demand. In response to supply chain disruptions out of China this year, many companies indeed intend on diversifying their manufacturing operations away from China, which has a low cost of labor. This would pressure profit margins. Large cap industrials and materials fell 1.81% and 2.48%, respectively.
Here’s what Wall Street’s saying:
Dan Eye, Head, Asset Allocation, Equity Research: Fort Pitt Capital Group to TheStreet:
"Once you have momentum really driving the bus, it’s always hard to point your finger and say what’s going to dent that momentum? Maybe it’s time to take some gains. One of our portfolio companies reported earnings last week and it looks like a lot of positive earnings results were driven by first half of the year demand from telecom companies that are responding to the pick up in demand. Now that’s kind of tapered off a little bit. Their customers are seeing weakness at the enterprise level. I do think there was some pull forward there. Investors might be adjusting their expectations a little bit.”
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
"Last week’s decline was technical in nature but fundamentally triggered. The market began to contemplate higher back-end rates as fiscal stimulus passes."
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"Although the longer-term outlook for the equity market remains constructive, there are reasons to expect the ongoing rally needs take a breather as stocks mover from weak to stronger hands. We suggest investors view this as an opportunity to rebalance their portfolios, rather than increase their cash positions. Essentially, a lot of good news is priced into the market. Not only is there clear evidence that the economy has turned the corner from recession to recovery.”
Market Haefele, Chief Investment Officer, Global Wealth Management, UBS:
“We recommend investors prepare themselves for the recovery into a world less global, more digital, and more indebted post COVID-19.”
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