Last week’s gains for the Dow Jones Industrial Average delivered a tale of two markets, with the blue-chip benchmark posting its best October on record, while Big Tech heavyweights took a hit that market veterans recalled as the dot-com bust. Early 2000s.
“You have a conflict,” Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), said in a telephone interview.
Gains weighed heavily on performance in the tech sector, particularly for megacap names. For all else, the market was short-term oversold, while optimism was built on expectations that the Federal Reserve and other major global central banks would be less aggressive in tightening monetary policy in the future, he said.
Read: Market expectations are beginning to shift toward a slower pace of Fed rate hikes
The fact is that the interest-rate-sensitive tech sector is typically expected to benefit from easing expectations for tighter monetary policy, Suzuki said, arguing that tech stocks will continue to underperform their peers for a long period of time after taking the lead. the market has been higher for the past 12 years, a performance limited by increased gains in 2020 after the start of the COVID-19 pandemic.
The RBA claims there has been “a huge bubble in key parts of the stock market for over a year”, Suzuki said. “We think this is a deflationary process and we think it will continue.”
It ended Friday at a two-month high, up nearly 830 points, or 2.6%, for 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 the biggest October gain on record if it holds through Monday’s close, according to Dow Jones Market Data.
While it’s been a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite COMP
and technology-related sectors fell sharply on Friday. The tech-heavy Nasdaq gained more than 2% for the week, while the S&P 500 SPX
up nearly 4% for the week.
Big Tech companies lost more than $255 billion in market capitalization last week. Apple Inc. AAPL
It escaped the carnage by rallying on Friday as investors looked good on a mixed earnings report. A disappointing earnings parade sank shares of Facebook’s parent company, Meta Platforms Inc. META,
Google parent Alphabet Inc. GOOG
Amazon.com Inc. AMZN
and Microsoft MSFT.
Mark Hulbert: Tech stocks go down – that’s how you’ll know when to buy them again
The five companies have collectively lost $3 trillion in market capitalization this year, according to Dow Jones Market Data.
Feedback: $3 Trillion Loss: Big Tech’s Terrible Year Gets Worse
Aggressive rate hikes by the Fed and other major central banks have punished tech and other growth stocks the most this year, as their value is based on expectations about earnings and cash flows. The accompanying rise in Treasury yields, considered risk-free, increases the opportunity cost of holding riskier assets such as stocks. And the longer this expected gain is extended, the bigger the hit.
Excessive liquidity – a key ingredient in any bubble – also contributed to technological weakness, the RBA’s Suzuki said.
Investors now see a risk to Big Tech earnings from a general slowdown in economic growth, Suzuki said.
“A lot of people have this idea that these are secular growth stocks and therefore immune to the ups and downs of the general economy — if you look at the earnings history of these stocks, that’s not empirically true at all,” he said.
Tech’s outperformance during the COVID-inspired downturn may have given investors the wrong impression, a sector benefiting from unique conditions that have seen households and businesses increasingly reliant on technology at a time when incomes are rising due to government fiscal stimulus. In a typical slowdown, tech returns are economically very sensitive, he said.
The Fed’s policy meeting will be the main event of the coming week. While investors and economists largely expect policymakers to introduce another supersize 75 basis point, or 0.75 percentage point, rate hike when the two-day meeting ends on Wednesday, expectations are growing for Chairman Jerome Powell to indicate that a smaller December rate cut may be on the table. .
However, all three major indices remain in bear markets, so the question for investors is whether this week’s bounce will survive if Powell fails to signal a reduction in rate hike expectations next week.
To see: Another jumbo rate hike by the Fed is expected next week, and life gets tough for Powell after that
These expectations stem from a number of components, including Caterpillar Inc., which has gained global economic wealth. Along with solid returns from CAT, it helped fuel the Dow’s big gains last week..
Art Hogan, chief market strategist at B. Riley Wealth Management, told MarketWatch’s Joseph Adinolfi on Friday that overall, the Dow benefited because it’s “very light on tech, very heavy on energy and industrials, and they’ve been winners.” “The Dow has more winners, and that’s been the secret to its success.”
Meanwhile, the Invesco S&P 500 Equal Weight ETF RSP outperformed,
The market-cap-weighted SPDR S&P 500 ETF Trust rose 5.5% for the week versus the SPY,
Tom Essaye, founder of Sevens Report Research, noted that while technology is more likely to fall into recession, “traditional parts of the economy, including sectors that trade at undervalues, are proving to be resilient.” , in a Friday note.
“Stepping back, this market and the economy more broadly is starting to remind me of 2000-2002, where extreme tech weakness weighed on the major indices, but more traditional parts of the market and economy fared better,” he said.
Suzuki said investors should keep in mind that “bear markets always signal a change in leadership,” which means technology won’t be reined in when the next bull market begins.
“You cannot argue that we have already received a signal, and the signal is that the next cycle will not look like the last 12 years,” he said.