Stocks fell considerably Monday in an ongoing correction led by not by growth tech stocks, but rather by growing concerns over the speed of the economic recovery.
The S&P 500 fell 1.16%, with the tech-heavy Nasdaq down just 0.13%. The price of crude oil fell 3.5% to $39 a barrel and the 10-year Treasury yield fell to 0.67%. Yields fall when prices rise.
Growth tech stocks have received a considerable rerating of valuation, as the Nasdaq 100 is now down more than 12% since Sept. 2. Tech stocks had run up to stratospheric valuations this year on accelerated demand for at-home services, which are also high-growth areas. Now, many are wondering whether there has been a massive pull-forward of demand, which makes later years far less growth-like than the next few years are.
But the selling in tech stocks abated by midday, with the Nasdaq 100 finishing up 0.4% for the day.
It was cyclical value that accounted for the drop in the S&P 500 to a level roughly in-line with where it was to start the year. The Vanguard S&P 500 Value ETF (VOOV) – Get Report, home to large cap defensive and cycle names, fell 2.56%. This indicates investors are worried about the speed of the economic recovery. Growth tech stocks have secular growth trends less correlated to economic output. Value stocks are largely tethered to the economic cycle. Some cyclical sectors trade at rich valuations, others at cheaper ones, though valuations are largely somewhere close to in-line with levels appropriate for the low interest rate environment.
So in order for value to continue rising, near-term earnings momentum must be upheld. With interest rates already near rock-bottom levels, fiscal stimulus is imperative to the economic recovery, with small businesses still not fully open and very much strapped for cash. Congress’ political will to spend more is waning and the tragic death of trailblazer and Supreme Court Justice Ruth Bader Ginsburg is casting doubt in the minds of investors that Congress will indeed focus on the stimulus bill.
Plus, more lockdowns are not out of the question, putting more pressure on small businesses, employment and consumer spend.
The 7-day moving average of daily new coronavirus cases in the U.S. recently hit 42,000, according to Johns Hopkins data. That’s up from 35,000 just weeks ago.
Reopening stocks were hammered. Delta Airlines (DAL) – Get Report fell harder than its peers, with a 9.2% down-move.
Here’s what Wall Street’s saying:
Lindsey Bell, Chief Investment Strategist, Ally Invest:
“Coronavirus concerns have resurfaced, worrying investors that a reversal in reopening progress could be near. More and more uncertainty is arising as we get closer to the election but no closer to Congressional fiscal relief. But we’re still optimistic this dip will be bought sooner rather than later. For now, the S&P 500 level we are watching is 3,186. That’s the 100-day moving average, a level that could be a floor for the selloff. Remember markets may not move with your goals in mind, but you do.”
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
“We believe much of the recent correction is du to the rally simply exhausting itself into longer-term resistance. However, we also think it coincided with disappointing progress on the passage of CARES Act 2 and a very lea message from the Fed that it does not plan to enact yield curve control as they implement average inflation targeting.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“The continuing pandemic coupled with the lack of further fiscal action means the Fed is likely to reinforce or even accelerate its aggressive monetary policy accommodation for years to come.”
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
“Investors are turning their attention back toward the stalled negotiations in Congress for another fiscal package, monitoring closely the prospects of a new round of stimulus that could inject more cash into the economy to fight the adverse effects of the pandemic through year-end and beyond. Bargain Hunting Among Large-Cap Stocks. While large-cap growth stocks in the U.S. appear expensive, their value counterparts are more fairly priced in comparison. For example, Glenmede estimates that growth stocks currently sit at the 94th percentile of long-term valuation, whereas value stocks only sit at the 66th percentile. As a result, investors looking for opportunities with markets near all-time highs may uncover some bargains among value stocks.”