Investors are ditching some of this year’s favourite trades as a retreat in the glitzy megacaps risks snowballing into a multi-pronged selloff that has hit everything from cryptocurrency to gold, and made calling the market’s next move ever more complex. Shares on Wall Street on Wednesday suffered their worst daily selloff since late 2022 , with the tech-heavy Nasdaq Composite dropping 3.6% and the S&P 500 down 2.3%. Both gauges pared some of those losses as they rebounded on Thursday afternoon.
The 2024 “everything rally” – stocks, and especially tech, up; gold and crypto – up; dollar – up; emerging markets, up – is on hold. A diverse set of factors has lit the fuse of market anxiety over how stretched valuations in Big Tech might be, against a backdrop of rising U.S.-China trade tensions and tepid earnings.
Results from Tesla and Alphabet, the first of the so-called “Magnificent Seven” group of trillion-dollar-plus companies to report, have unnerved investors about next week’s batch of results. The group also includes Apple and AI poster-child Nvidia.
“Investor positioning was pretty pro-risk and people had become quite positively inclined towards markets and valuations had become quite stretched,” said Toby Gibb, head of investment solutions at fund manager Artemis in London.“It’s difficult to call whether the market is going to continue correcting.”
Volatility has picked up, with the VIX index rising on Wednesday by the most in a day for two years and set to keep increasing if markets fall further.
“On the upside, (markets) are valuation insensitive and this is the same on the downside. The volatility compression you have on the way up goes in the opposite direction on the way down,” Mario Baronci, portfolio manager at Fidelity International, said.
Wall Street’s AI boom has created a two-tier stock market, with megacap stocks driving most of the S&P’s ascent to record highs, as the 493 others mostly bumble along.
Keith Lerner, co-chief investment officer at Truist Advisory Services, maintains a favourable long term on tech stocks but believes they may be vulnerable to more volatility going forward.
“Tech is correcting following the strongest two-month relative outperformance since 2022,” he wrote in a Thursday report. “Our base case is that the longer-term bull market remains intact, but it’s often two steps forward, one step back.” Meanwhile, China’s economy is slowing faster than economists and Beijing authorities anticipated, sucking commodities into the down-draught. Europe’s home-grown luxury megacaps, another favoured trade, have shed a quarter of a trillion dollars in value since their peak in March.
WHITE HOUSE ROLLERCOASTER
Adding to the mix is a rollercoaster race for the White House, where Democrat President Joe Biden rescinded his candidacy for Vice President Kamala Harris shortly after an assassination attempt on Donald Trump. The Republican candidate’s anti-China rhetoric and predilection for big spending has hit chipmakers around the world and hurt U.S. 30-year government bonds.
But some big investors are certain this is a bull market dip that became undeservedly shrouded in geopolitical risk language.
“I think these narratives are being used to create some excuse for what was probably just some sort of summer profit taking,” said Richard Clode, tech portfolio manager at Janus Henderson Investors.
As stocks and other 2024 star assets like gold, up 14% this year, have been pounded this week, small cap shares and classic havens such as the Swiss franc and the Japanese yen, have surged.
That is more than just a flight from risk.
These currencies have been used for years to fund holdings with juicier returns. As the Federal Reserve prepares to cut interest rates and doubt creeps in about the robustness of the equity market rally, those so-called carry trades are unravelling.
This heaps further pressure on the dollar, although shorter-dated Treasuries have gained this week, pulling yields down to almost six-month lows.
BITCOIN SYNDROME
With summer trading usually thin and a typical volatility spike in the early autumn, this is a time investors take profits, Clode said, adding that this could present a buying opportunity.
Many investors, long-primed to see pull-backs as bull-market blips and often more focused on asset prices over valuations, could agree.
“I call this the ‘bitcoin syndrome’. When it goes down people don’t mind. People think sooner or later it will go up and that a correction is a good time to re-enter the market,” Fidelity’s Baronci said.
Bitcoin itself, however, has dropped 5% in as many days to around $64,000.
Trade Nation senior market strategist David Morrison warned against complacency.
“Further gains are predicated on solid second quarter results, together with positive guidance for the current quarter. If that isn’t forthcoming, then expect more profit-taking to emerge,” he said.
“Investors have a muscle-memory for this type of thing.”