The past week provided a tale of two markets: A rally in the Dow Jones Industrial Average put the blue-chip gauge on track for its best October ever, while Big Tech heavyweights suffered a rout that left market veterans recalling the dot-com bust. The beginning of the 21st century.
“You have a tug of war,” said Dan Suzuki, chief investment officer at Richard Bernstein Advisors LLC (RBA) in a telephone interview.
In the technology sector, especially in the name of mega cabinets, the result significantly weakened performance. For everything else, the market was short-term oversold, while optimism grew above expectations that the Federal Reserve and other major global central banks will not be as aggressive in tightening monetary policy in the future, he said.
Read: Market expectations are starting to turn in the direction of a slower rate hike by the Fed
Clearly, the rate-sensitive technology sector is generally expected to benefit from moderation in expectations of tighter monetary policy, said Suzuki, who argues that tech stocks are likely to be long-term underperformers after management. the market has been higher over the past 12 years, and performance will be limited by soaring gains since the outbreak of the COVID-19 pandemic in 2020.
The RBA has argued that “there has been a big bubble in the stock market for the big stocks for over a year now,” Suzuki said. “We believe this is a process of bubble deflation, and we believe there is still more to do.”
rose nearly 830 points, or 2.6%, on Friday to close at a two-month high and post a weekly gain of more than 5%. The blue-chip gauge was up 14.4% in October through Friday, which would mark its strongest monthly gain since January 1976 and its biggest October gain if it holds through Monday’s close, according to Dow Jones market data.
While it was a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite COMP,
and technology-related sectors rebounded sharply on Friday. The tech-heavy Nasdaq turned in for a weekly gain of more than 2 percent, while the S&P 500 SPX,
rose almost 4% in the week.
Big Tech companies lost more than $255 billion in market value last week. Apple Inc. AAPL,
escaped the carnage, rallied on Friday as investors seemed fine with a mixed earnings report. A parade of disappointments sank the shares of Facebook’s parent company, Meta Platforms Inc. META,
Google’s parent Alphabet Inc. GOOG,
Amazon.com Inc. AMZN,
and Microsoft MSFT,
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The five companies have lost a combined $3 trillion in market value this year, according to Dow Jones Market Data.
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Aggressive rate hikes by the Fed and other major central banks have punished technology and other growth stocks the most this year, as their value is based on earnings and cash flow expectations far into the future. The associated rise in yields on Treasurys, which are considered risk-free, raises the opportunity cost of holding riskier assets such as stocks. And the longer the expected income stretches, the bigger the hit.
The RBA’s Suzuki said excess liquidity – any key factor in the bubble – has also contributed to the weakness in the technology.
And now investors see a growing risk to Big Tech’s earnings from a slowdown in overall economic growth, Suzuki said.
“A lot of people think that these are secular growth stocks and therefore immune to the ups and downs of the whole economy – that’s not true at all empirically if you look at the history of returns on these stocks,” he said.
Tech’s better performance during the COVID-induced downturn may have given investors the wrong impression, as the sector benefited from unique conditions where households and businesses became more dependent on technology at a time when incomes rose sharply due to government fiscal stimulus. In a typical slowdown, technology gains tend to be very financially sensitive, he said.
The Fed’s policy meeting is the main event of the coming week. While investors and economists expect an overwhelming rate hike of 75 basis points, or 0.75 percentage point, from policymakers when the two-day meeting ends on Wednesday, Chairman Jerome Powell is expected to indicate a smaller December is on the table. .
However, all three major indexes remain in a bear market, so the question for investors is whether this week’s bounce will last if Powell fails to show that next week’s interest rate hike expectations are easing.
Look: Another jumbo rate hike by the Fed is expected next week, and then Powell’s life will get tough
Those expectations helped fuel the Dow’s big gains last week, along with solid earnings for several components, including global economic bellwether Caterpillar Inc. CAT,
Overall, the Dow benefited because it’s “very technical and very heavy on energy and industrials, and those have been winners,” Art Hogan, chief market strategist at B. Riley Wealth Management told MarketWatch’s Joseph Adinolf on Friday. “The Dow just has more winners, and that’s been the secret to its success.”
Meanwhile, Invesco S&P 500 Equal Weight ETF RSP is outperforming,
gained 5.5% for the week compared to the market cap-weighted SPDR S&P 500 ETF Trust SPY,
stressed that while technology may be vulnerable to larger declines, “traditional parts of the economy, including sectors that trade at lower valuations, have proven resilient as the broad market rebounded nearly two weeks ago,” said Tom Essaye, founder of Sevens Report Research. , in Friday’s note.
“Back then, these markets and the broader economy are starting to remind me of the 2000-2002 setup, when extreme technology weakness weighed on the major indexes, but more traditional parts of the market and economy fared better,” he wrote.
Suzuki said investors should remember that “a bear market always signals a change in leadership” and that means technology won’t take over when the next bull market begins.
“You can’t argue that we’ve already got a signal and the signal is that the next cycle will look nothing like the last 12 years,” he said.
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