The relentless march to all-time highs has come to a halt in recent weeks as volatility returned. The US stimulus log jam, obscure options trading by SoftBank, and concerns around giant tech stock valuations culminating in a market sell-off. This week’s 2.5% decline in the S&P 500 marks the benchmarks first back-to-back weekly drop since May. The tech-heavy NASDAQ, which has been riding the wave of unprecedented tech strength in recent months, fell into a technical correction this week as it fell 10% from the record highs it had set just six days previous.
With the recent market surge in August culminating in the best August for the NASDAQ in 36 years, a correction is by no means surprising and is viewed more as normal digestion of the markets recent substantial gains as opposed to any significant fundamental changes.
The dollar weakness this week was driven by positive rhetoric from the ECB. Christine Legarde played down concerns over the Euro’s strength and how it would impact trade competitiveness while also expressing optimism around a European recovery.
0.67%US 10Y TREASURY YIELD
Treasuries increased this week as jitters in equity markets had investors sticking to safer assets. The 10-Year Treasury Yield fell to 0.67% from 0.72% over the week. Increasing inflation figures, falling unemployment, and vaccine developments will all function to steepen the yield curve in the coming months.
Oil faltered again this week as the global economy struggles to return to pre-pandemic levels of oil demand. Crude oil fell below $40 a barrel as weekly inventories rose by nearly 3 million barrels last week despite an expected reduction.
There has been a lot of talk recently around the formation of a tech bubble akin to what we saw prior to the dot com bubble bursting in 2000. While valuations are no doubt stretched in the sector relative to the historical average, they remain well behind the 57X earnings seen at the peak of the dot com era.
Massive demand for technological advancements as a result of this pandemic has created strong earnings and free cash flow across the Tech space, the likes of which were not present in 2000. Another significant difference is the historically low-interest rates that allow these growth companies to expand at an accelerated pace. Supportive central bank policies also function to erode much of the traditional opportunities for yield within the fixed income space, which continues to create a strong argument for equities, ensuring the equity risk premium remains strong relative to its fixed income counterpart.
The current environment and momentum could allow the Tech sector to continue to push markets higher in the short term, with the market likely to be driven by a broader recovery across other sectors over the medium to long term.