Technology stocks that have powered US equities to record highs went into sharp reverse yesterday, sending the Nasdaq Composite index tumbling almost 5 per cent in its biggest fall since June.
Apple's shares lost 8 per cent — wiping more than $150 billion from the iPhone maker's value. Amazon, Alphabet and Microsoft all fell more than 4 per cent. Several of the coronavirus era's superstar stocks, such as Tesla and Zoom Video Communications, suffered even steeper drops.
The pullback offered a reminder that the US equity market's 55 per cent rally since the depths of the crisis in March is still vulnerable to short-term shocks.
The five biggest US companies — Apple, Amazon, Microsoft, Alphabet and Facebook — have a combined value of almost $8 trillion, but were trading at an average of 44 times their expected earnings, close to the 50 times price-to-earnings ratio the five biggest stocks boasted at the dotcom bubble peak, according to Oxford Economics.
Although aggressive monetary and fiscal stimulus has helped engineer a dramatic recovery since March, some investors and analysts have been concerned that a correction was overdue, especially considering the economic scars of coronavirus, worries over a second wave of infections this year and a potentially disruptive US presidential election in early November.
"We are not out of the woods, in fact quite the contrary," said Savita Subramanian, an equity analyst at Bank of America. "Speed bumps" still lie ahead, she warned.
Technology stocks benefited from rampant investor demand in recent months but have divided opinion on the sustainability of the rally. Bumper bets in derivatives markets have raised expectations of large price swings to come, and prompted what some traders have identified as a feedback loop in which bullish options bets prompt further increases in stock prices.
"It's an ugly day," said Alicia Levine, chief market strategist for BNY Mellon Investment Management. "This is a healthy skimming off the top — it doesn't feel very good if you're over-levered to tech but this is a healthy correction."
The S&P 500 fell 3.5 per cent, snapping a winning streak that had brought gains in 11 out of the 13 previous sessions. The Nasdaq Composite dropped 5 per cent and the more industry-heavy Dow Jones Industrial Average declined almost 3 per cent.
The Vix index, a measure of the S&P 500's expected volatility based on options that is sometimes called Wall Street's "fear gauge", on Thursday jumped above the 30-point mark for the first time since mid-July. The equivalent volatility index for the Nasdaq shot up to more than 40 points — nearly double its mid-August low.
The declines have punctured a powerful stock market run that received further fuel last week when US Federal Reserve chair Jay Powell indicated the central bank would allow inflation to run beyond its usual target range before it taps the brakes with interest-rate rises. That solidified the view that borrowing costs will remain subdued for years to come, and increased the lustre of equities despite stretched valuations.
Charles Evans, president of the Chicago Fed, called for Congress and the White House to reach an agreement on a hefty new round of fiscal stimulus, saying the course of the US recovery would "critically depend" on "substantial additional support" from fiscal policy to avoid sharp reductions in household spending and a wave of business failures.
"Partisan politics threatens to endanger additional fiscal relief. A lack of action or an inadequate one presents a very significant downside risk to the economy today," he added.
Despite Thursday's stumble, the S&P 500 index remains 7 per cent higher so far this year, while the Nasdaq Composite is up 28 per cent. The New York Stock Exchange's "Fang+" index — which includes other hot tech stocks such as Tesla and Alibaba — has climbed almost 75 per cent in 2020.
Even within the blue-chip S&P 500 index, there has been a widening gulf between the biggest "mega cap" stocks and the rest of the benchmark. In August the 50 biggest constituents climbed almost 10 per cent, compared with under 4 per cent for the remainder, according to Bank of America.
Benchmark 10-year Treasury yields edged lower by 0.01 percentage points to 0.64 per cent as investors bought government debt as a safe haven. Gold, typically another haven asset when stocks sell off, fell 0.6 per cent to $1931.36 per troy ounce, however. Brent crude, the oil price benchmark, fell 1 per cent to below $44 a barrel.
Sophie Huynh, cross-asset strategist at Societe Generale, said concerns about the US election were holding investors back from sectors traditionally seen as sensitive to economic fluctuations such as energy, consumer products and industrials — even though US coronavirus cases are stabilising and the economy has improved. First-time jobless claims in the US were below 1m last week for the first time since mid-March.
European bourses also suffered from wild trading on Thursday, giving up early gains. The continent-wide Stoxx 600 index closed down 1.4 per cent. France's CAC 40 gave up gains of 1.6 per cent on the day that Paris launched its €100bn fiscal spending plan, closing 0.4 per cent lower. London's FTSE 100 ended down 1.5 per cent.
The dollar pared earlier gains, dipping lower for the day, after dropping 10 per cent since March.
The euro rebounded from losses earlier in the day stemming from ECB policymakers concerns over its appreciation. The eurozone currency finished flat at $1.1857 on Thursday, after a Financial Times report that several members of the ECB's governing council had expressed concerns over its rise against the dollar ahead of a monetary policy meeting next week.
Written by Joe Rennison, Harry Dempsey and Katie Martin in London, and Robin Wigglesworth
© Financial Times Ltd