Stocks are massively selling off by midday Thursday. Tech stocks were leading the market down, after having entered the day at massive valuations, while cyclical stocks actually rose.
The S&P 500 fell 3%, dragged down by the tech-heavy Nasdaq, down 4.5% as of noon Thursday. The 10-Year treasury yield fell to 0.63% from 0.66%.
In the morning, jobless claims for the past week came in at 880,000, far better than economists' estimates of 940,000. This points to continued speediness in the economic recovery. Many cyclicals like airlines and bank stocks were up to start the day.
Investors were rotating out of growth and a bit more into value.
"Valuations have been stretched when it comes to Tesla, Google, Apple, etcetera,” Marc Preffer, chief investment officer at CLS Investments, told TheStreet. “There’s a rotation going on out of those sectors.”
The large cap tech stocks, which have a substantial market cap weighting in the S&P 500, sold off. The NYSE FANG Index fell 4.9%, with Apple (AAPL) down 5.9%. Also, Tesla (TSLA) fell 7.4%. These two stocks were at sky-high valuations. Apple was taking at over 30 times next year’s earnings per share estimate, while it’s expected EPS compound annual growth rate is expected to be roughly 8% for the next few years. By standard valuation metrics, that’s an incredibly expensive valuation.
Wednesday, just before the sell-off, Dan Eye, head of asset allocation and equity research for Fort Pitt Capital Group told TheStreet “can they [Apple] sustain that 8% CAGR? Absolutely, but I just would call the valuation fairly optimistic.”
As uncertainty over the speed of the economic recovery has remained a theme, investors have piled into growth tech stocks, which can power through these headwinds, ditching cyclical value. Add to theft the fact that the at-home environment has been another tailwind for big tech and one can see why The Nasdaq 100 is up 35% year-to-date. The Vanguard S&P 500 Value ETF VOOV is down 9% for the year, although it was only down 1% Thursday.
Strategists note that the difference in performance between growth and value this year, as a ratio, has far surpassed that of the market melt-up that preceded the technology bubble at the start of the century.
As for Thursday, Prefer also noted that, as the polls for the U.S. election show a widening percentage point differential one day and a narrowing differential the next for Senator Biden and President Trump, markets are given to volatility. This is a normal dynamic heading into a presidential election.
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