Stocks absolutely cratered Thursday. Tech investors, who were growing wary of sky-high valuations, ran for the hills, bringing all other major U.S. indices down on a day which was looking positive from an economic standpoint.
In the morning, jobless claims for the past week came in at 880,000, far smaller than economists' estimate of 940,000. Cyclical stocks like airlines, oil and banks were up. And large cap cyclicals — as well as the broader large cap value group of stocks — did outperform Thursday, even though they fell a bit. The jobless numbers showed that the economy still has a chance to continue its speedy recovery, even with consumer and business confidence remaining muted on account of question marks over more fiscal stimulus. Rock bottom interest rates may not be able to stimulate the economy as much from here.
But tech ruined the otherwise decent day.
The S&P 500 fell 3.51%, dragged down by the large-cap tech components of the Nasdaq 100, which fell 5.23%. Although economically-sensitive stocks like airlines rose just under 1%, the 10-Year treasury yield fell to 0.63% from 0.66%.
These stocks, after having outperformed value stocks by a wider margin than tech stocks outperformed value in 2000 (just before the tech bubble burst), were trading at incredible valuations leading into Thursday. Apple’s PEG ratio — the price-to-earnings ratio divided by the expected earnings per share growth rate for the next 3 years — was at 4. This ratio compares the total equity valuation to earnings growth expectations. A PEG ratio of roughly 2 is usually seen as healthy, or close to fully priced. Tesla’s PEG was about 4 as well. Some say, with valuations still high and the Nasdaq 100 still up 8.5% since August 11, the selling in tech could continue from here. The price performance of growth stocks on the S&P 500 has beaten value by a wider margin than what the index saw in 2000, just before the tech bubble bursted.
The run-up in tech came as uncertainty over the currently-fast economic recovery drive money into growth names that can both power though economic headwinds and experience an additional tailwind from the stay-at-home environment. Questions over how much adoption in growth businesses like cloud, streaming and e-commerce has been pulled forward from later years is weighing on investors’ perceptions of fair valuations.
Here’s what Wall Street’s saying:
Marc Pfeffer, Chief Investment Officer, CLS Investments to TheStreet:
"Valuations have been stretched when it comes to Tesla, Google, Apple, etcetera. There’s a rotation going on out of those sectors. Part of this is a rotation [into value from growth] and part of it is just the valuations have gotten unwieldy.”
Lindsey Bell, Chief Investment Strategist, Ally Invest:
"Today’s drop is the biggest for the S&P 500 since June 11. There were no major headlines or obvious triggers for the plunge, but it’s left investors wondering if the day’s drop signals another historic market event, or just a little in-flight turbulence. When it was all said and done, 10 of 11 S&P 500 sectors are lower. Moody markets can take a toll on your emotions, especially in a world full of as much uncertainty as ours. But even with today’s drop, we’re still above the peak we reached in February. Most signs still point to an economic recovery. But there are a lot of obstacles between now and the end of the year: Stimulus uncertainty, budget negotiations, presidential debates, corporate conferences, and the election. The next few months could be a bumpy ride."
Rick Swope, Senior Director, Investor Education E*trade:
"While today’s selloff is an outlier for sure—some may have seen it coming. Traders tracking the footprints of the Street’s smart money may have found some interesting moves from hedge fund managers lightening up on tech and health care and bulking up on industrials and financials. And our August customer sector data displayed similar moves—with net selling in tech and health care and net buying in industrials and financials—once again demonstrating retail and smart money have been moving in sync. Taken together the market is witnessing a significant rotation out of two favored sectors and squarely into two somewhat downtrodden sectors. And there could be something to the shift after all—the S&P industrial sector has held its own in the market rebound, outperforming the SPX roughly 10.5% to 8.5% over the past month. That said, a sudden sell-off in tech may raise some red flags, but sector rotation is a good thing. While adding breadth to the market, dedicated traders may benefit from seeking opportunities outside of overbought names."