The US stock market crash is still far away from happening. Instead, a rotation from tech stocks, who dominated last year, seems underway. The hashtags #stockmarketcrash is trending, but most analysts see it as premature. In fact, losses for the major indices remain relatively minor. The Dow Jones Industrial Average (DJIA) dropped -1.11% while the S&P 500 (SPX) fell a bit more at -1.34%. Meanwhile, Nasdaq Composite (COMP) dropped -2.11% and entered market correction territory. Market corrections are defined as a loss of more than 10%. So this recent blip is not even a correction for DJIA and SPX, let alone a crash for Nasdaq. What gives?
Is the #StockMarketCrash Happening?
Short answer: No. It’s good that investors are asking this question before they run for the hills. In addition, they should check if the price action took the market by surprise. That’s according to Brad McMillan, a chief investment officer of Commonwealth Financial Network. The answer is also no. The reason for rising bond yields is the result of an increasingly optimistic outlook for the economy.
Thursday’s market panic gave the same effect as last week’s selloff. These last two weeks saw an active selloff in the Treasury bond market. The yield on the 10-year Treasury note TMUBMUSD10Y is at 1.574%, which registered higher at 1.6% last week. Now, it’s creeping above 1.5% territory once again. Even as Federal Reserve Chairman Jerome Powell insisted they will not raise interest rates, the market seems to hesitate. Many see incoming increases in inflation, which can mean that the central bank will scale down earlier than planned.
Pullback as Yield Rise
Market forces dictate that stocks will start pullbacks as yield rises. At the same time, it shouldn’t surprise anyone that growth stocks such as those in the tech sector are now feeling the pressure to sell. Many tech stocks saw dizzying growth last year as their valuations went off the charts.
Like in any rotation cycle, investors are now taking profits on these high-growth stocks. Then, they use the proceeds to buy stocks that focus on increasing their value. In a note, Lindsey Bell, Ally Invest’s chief investment strategist, said rising yields are often a good indication of an incoming bull market. While this signals stronger growth ahead, the rotation might be too nerve-wracking isn’t for the investor. “Higher yields tend to hit highfliers harder. That’s why we’ve seen stocks like Tesla and Peloton fall more than 30% this year,” she said.
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The Weight of Tech Stocks
Overweight tech and tech-related stocks will often bear the brunt of cyclical rotations. In fact, many major stocks such as Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, and Nvidia comprise almost a quarter of the S&P 500. “The weakness in large-cap tech has been weighing on the broad market averages, sparking concerns of a market top and the end of the cycle. From our perspective, breadth remains strong, a characteristic that is typically not present at market tops,” said Kevin Dempter, Renaissance Macro Research analyst.
Meanwhile, small-cap discretionary stocks are registering absolute and multiyear highs relative to large-cap discretionary stocks. This means the market is experiencing broad-based participation. Sectors such as energy and financials/banks are among the projected winners in the shift to value stocks. Also, economically sensitive groups like transports and services will also reap benefits.
“Rather than a market top, we think this is rotational in nature with limited downside, and going forward we want to be overweight high yield winners like banks and energy as there is likely further outperformance in these groups to come,” Dempter added.
What About the Stock Market Crash?
Given the rates in which the markets went down, the present situation is far from a crash that doomsayers are projecting. Since the pandemic lows last year, the S&P 500 remains above 72%, while the Dow rallied nearly 70%. Also, despite its recent pullback, Nasdaq remains up more than 90% over that stretch.
Watch the CNBC Television video report where JP Morgan’s Gabriela Santos says there’s still time to rotate from growth to value stocks:
Do you believe that a stock market crash is happening now? Or do you agree that the recent pullbacks are part of a rotation from growth to value stocks? Let us know what you think about the current stock market behavior. Share your comments below.