Stocks across the board fell Friday, with tech once again leading the market down.
The S&P 500 fell 1.1%, dragged down by the large cap tech components of the Nasdaq 100, which fell 1.2%. Even as economically-sensitive stocks fell (though they outperformed tech), the 10-Year Treasury yield rose to 0.69%. Yields rise when prices fall. Usually, when the equity market falters, money moves into safe bonds.
FAANG stocks fell more than 2%, as did many other growth tech stocks. Investors are still in the midst of a valuation re-rating, as demand for at-home services like e-commerce, cloud and streaming, which were already secular growth areas, has surged this year, now prompting investors and even some analysts to ponder whether there has been a massive pull-forward of demand from later years. Facebook (FB) - Get Facebook, Inc. Class A Report shares held in with relative strength, only falling 0.9%. President Trump says if Oracle doesn’t complete its deal with Chinese-owned TikTok, the app will be banned in the U.S. Sunday, a tailwind for Facebook’s user share.
Another headwind for tech is the exploding IPO market. Just this week, Snowflake and Unity Software went public, raising billions of dollars. According to data from Ally Invest, the IPO market is expected to hit $80 billion in 2020. The biggest IPO year since 1990 sported $60 billion. This adds some — not plenty — of supply of capital to the market for growth stocks. In an uncertain economic environment, investors are looking for growth stocks that can power through economic headwinds. FAANG stocks are under the microscope, so the market welcomes alternative stock picks.
All cyclical sectors fell hard as well. Interest rates are near rock-bottom levels and the continued speed of the economic recovery may hinge on more fiscal stimulus, which hasn’t yet been passed and may only total $500 billion, compared to recent rounds of more than $1 trillion this year. Small businesses are still closed and need cash in order for employment and consumer spend to continue on its fast-track to full recovery.
Here’s what Wall Street’s saying:
Michael Hartnett, Chief Investment Strategist, Bank of America Global Research:
"Why phase 4 fiscal stimulus needed for phase 2 recovery: global economy on cusp of restocking cycle but requires DC fiscal stimulus to spark next phase of recovery (capex); $1-2tn of phase IV US fiscal stimulus plus expectations of vaccine would likely boost banks, HY bonds, EM assets and distressed value in Sept/Oct, accelerate structural rotation to inflation; disappointment on fiscal stimulus would threaten SPX 3300-3600 floor, force unwind of consensus "barbell" of tech & industrials, exacerbate pre-election nerves of "contested election" (+ve vol) and/or "blue wave" (-ve US dollar).”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"We expect volatility, but investors should stay invested, aligned with their financial plan, and use volatility to build up long-term positions. Diversify for the next leg Investors should look to diversify beyond US mega-cap tech, into areas including the UK equity market, US mid-caps, emerging market value, and global industrials.”
Lindsey Bell, Chief Investment Strategist, Ally Invest:
"Over 100 companies went public from June to August in the busiest stretch for IPOs since 2000. Popular consumer tech names like DoorDash, Airbnb and Bumble could jump on the bandwagon soon. This week, an unprofitable software company named Snowflake pulled off a $3.4 billion IPO, the biggest of the year. Interest in IPOs could last for a while – that is, as long as the market behaves. But it’s important to do your homework on riskier stocks like IPOs. They’re not always home runs, despite the run they’ve enjoyed this year. If you do go for an IPO, try to give it some time instead of trading the ups and downs."
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