Does the Tech Pullback Portend a Market Crash?

Jack Ablin Market Commentary

Large-cap tech companies have enjoyed an astounding rally this year despite the pandemic, or perhaps because of it. The 5 FAAMG stocks – Facebook, Apple, Amazon, Microsoft and Google – expanded 65 per cent through September 1 before plunging nearly 20 per cent during the first week of September, begging the question: Is the most recent pullback a simple correction or a harbinger of something more serious? One thing is clear: even though the big five comprise nearly one-quarter of the S&P 500’s market capitalization, what happens to them is not representative of the other 495 companies in the Index. In fact, the S&P 500 at large is only 7.2 per cent higher this year. 

This year’s economic uncertainty is a perfect recipe for companies, like FAAMG, that sport high cash levels, strong balance sheets and possess business models that are impervious to the vagaries of the lockdown. Since March, investors have viewed their equity portfolios the way bond holders regard their portfolios, with an eye on which holdings have the highest likelihood of surviving the economic drought and which ones could flounder. Through that binary lens, large tech was considered triple-A while travel and entertainment companies were considered junk. Take Amazon, for example. No other company so epitomizes the advantages of size and scale in a business model that was not only insulated from the lockdown but positioned to thrive in such an environment. The stock kicked off 2020 at $1,850/share and peaked at over $3,500/share, a 90 per cent move higher, before pulling back. Buying momentum was powerful: by July, the stock traded more than two standard deviations above its 90-day moving average. 

The tech surge, however, should not be confused with a broad market rally. In fact, about half of the S&P constituents remain in negative territory for the year. Without the help of the FAAMG expansion, the S&P 500 overall would be negative 4.5 per cent so far in 2020, suggesting the downside risk to the overall market is limited. 

At the same time, investor bearishness is widespread. A recent American Association of Individual Investors (AAII) survey showed that bullishness is stuck in the bottom decile of its historical range.  History suggests that markets tend to perform better when there’s an opportunity for them to outperform investor expectations. Nowadays, investor expectations are about as low as a limbo stick.    

The recent tech selloff has been coupled with offsetting gains in economically sensitive sectors, suggesting investors are beginning to sense light at the end of the tunnel in the pandemic battle.  Perhaps it’s coincidental, but the selling commenced on September 2, the day the CDC announced plans for a November 1 vaccine rollout. The following week, Pfizer’s CEO Albert Bourla told CBS’ Face the Nation the company is prepared to distribute “hundreds of thousands of doses” before year’s end if the FDA approves their vaccine. It’s interesting to note that Royal Caribbean, a company that embodies the downside risk of a global pandemic, has outperformed Amazon, a company whose business model was custom made for this year’s stay-at-home society, by nearly 40 percentage points since mid-March, with most of the outperformance occurring since mid-July. Investors, like the rest of us, are ready to put this chapter behind us. 

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