Last week provided a tale of two markets, with gains in the Dow Jones Industrial Average putting the top gauge on track for its best October on record, while Big Tech heavyweights suffered a shellacking that for market veterans to remember the dot-com crash in the early 2000s.
“You have a tug-of-war,” Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), said in a telephone interview.
For the tech sector, especially the megacap names, the gains were a big drag on performance. For the rest, the market was oversold in the short term, while optimism grew on expectations that the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy going forward, he said. .
Read: Market expectations are beginning to shift toward a slower pace of rate hikes by the Fed
Tellingly, the interest-rate-sensitive tech sector is typically expected to benefit from a moderation in expectations of tighter monetary policy, said Suzuki, who maintains that tech stocks will likely have a long period of underperformance compared to peers after leading the market higher for the past 12 years, a performance limited by rising earnings after the start of the COVID-19 pandemic in 2020.
RBA has been arguing that there was “a significant bubble in the main parts of the stock market for over a year”, Suzuki said. “We think this is the process of deflating the bubble and we think there’s probably more to go.”
The Dow DJIA, +2.59% rose nearly 830 points, or 2.6%, on Friday to finish at a two-month high and post a weekly gain of more than 5%. The blue-chip gauge’s October gain was 14.4% through Friday, which would mark its strongest monthly gain since January 1976 and its biggest October gain on record if it holds through Monday’s close, according to Dow Jones Market Data.
While it was a rough week for many of Big Tech’s biggest beasts, the Nasdaq Composite COMP, -8.39% and tech-related sectors rebounded sharply on Friday. The tech-heavy Nasdaq swung to a weekly gain of more than 2%, while the S&P 500 SPX, +2.46% rose nearly 4% for the week. But the Nasdaq is significantly underperforming the Dow in October, with a monthly gain of 5%. The Dow’s 9.4 percentage point outperformance on the Nasdaq is the strongest since February 2002.
Big tech companies lost more than $255 billion in market capitalization last week. Apple Inc. AAPL, +7.56% escaped the carnage, rebounding on Friday as investors seemed okay with a mixed earnings report. A disappointing earnings parade sank shares of Facebook parent Meta Platforms Inc. META, +1.29% Google parent Alphabet Inc. GOOG, +4.30% GOOGL, +4.41% Amazon.com Inc. AMZN, -6.80% and Microsoft MSFT, +4.02%.
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Combined, the five companies have lost a combined $3 trillion in market capitalization this year, according to Dow Jones Market Data.
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Aggressive interest rate hikes by the Fed and other major central banks have punished tech and other growth stocks this year, as their value is based on earnings and cash flow expectations in the future The accompanying rise in yields on Treasuries, which are considered risk-free, increases the opportunity cost of holding riskier assets such as stocks. And the more spread out the expected gains, the greater the success.
Excess liquidity, a key ingredient in any bubble, has also contributed to technology weakness, RBA’s Suzuki said.
And now investors see an emerging risk to Big Tech earnings due to a general slowdown in economic growth, Suzuki said.
“Many people have the idea that these are secular growth stocks and therefore immune to the ups and downs of the general economy, this is not at all empirically true if you look at the history of the returns of these stocks “, he said.
Technology’s outperformance during the COVID-inspired recession may have given investors a false impression, as the sector benefited from unique circumstances that saw households and businesses become more reliant on technology at a time when that revenues were increasing due to the government’s fiscal stimulus. In a typical slowdown, technology benefits tend to be very economically sensitive, he said.
The Fed’s policy meeting will be the main event next week. While investors and economists overwhelmingly expect policymakers to deliver another rate hike of 75 basis points, or 0.75 percentage point, when the two-day meeting ends on Wednesday, expectations are rising that Chairman Jerome Powell indicate that a smaller December may be on the table. .
However, all three major indexes remain in bear markets, so the question for investors is whether this week’s bounce will survive if Powell does not signal a downward shift in rate hike expectations next week.
See: Another jumbo Fed rate hike expected next week, then life gets tough for Powell
Those expectations helped fuel the Dow’s big gains over the past week, along with solid gains in a number of components, including global economic sector Caterpillar Inc. CAT, +3.39%.
Overall, the Dow benefited because it’s “very technology light, and it’s very heavy on energy and industrials, and those have been the winners,” Art Hogan, chief market strategist at B. Riley Wealth Management, said on Friday in MarketWatch’s Joseph Adinolfi. “The Dow just has more of the embedded winners and that has been the secret of its success.”
Meanwhile, the Invesco S&P 500 Equal Weight ETF RSP, +2.08% outperformed the market-cap-weighted SPDR S&P 500 ETF Trust SPY, up 5.5% for the week, +2.38%, stressed that while technology may be vulnerable to further declines, “traditional parts of the economy, including sectors that trade at a lower valuation, are proving resilient since the broader markets they rebounded almost two weeks ago,” Tom Essaye, founder of Sevens Report Research, said in a note on Friday.
“Stepping back, this market and the economy in general is starting to remind me of the 2000-2002 setup, where extreme tech weakness weighed on the major indices, but the more traditional parts of the market and the economy they performed better,” he wrote.
Suzuki said investors should remember that “bear markets always signal a change in leadership” and that means technology won’t take over when the next bull market begins.
“There’s no disputing that we already have a signal and the signal is that the next cycle will be nothing like the last 12 years,” he said.