Tech Stocks Sell-off Ahead of Fed Meeting
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 06/09/17. Rates and Economic Calendar Data from Bloomberg as of 06/12/17.
There was a bit a volatility in the daily returns of the U.S. stock market last week as the S&P 500 Index declined in three of the five trading days and ended the week 0.27% lower. The tech heavy NASDAQ 100 Index felt the brunt of the selling pressure, however, with a daily loss of 2.4% during Friday’s trading session, resulting in a weekly loss of the same magnitude. The Russell Midcap Index fell 0.4% last week while the Russell 2000, which is generally considered to be an index of small cap stocks, gained 1.2%. This is actually the first time this year that small cap stocks have had a positive weekly return while both mid and large cap stock indices declined in value. Internationally, developed markets took a bit of a breather, falling 1.2% while emerging markets gained 0.4%.
The Federal Open Market Committee (FOMC) is scheduled to begin their two day meeting on Tuesday, June 13, and will conclude it with the likely announcement of a 0.25% rate hike on Wednesday, June 14. We do not expect a strong market reaction since this move is widely expected and thus already presumably priced-in but we will be paying close attention to the FOMC’s projections and Fed Chair Yellen’s press conference afterwards for additional insights into the future path of monetary policy.
Friday’s sell-off in technology stocks caught many investors by surprise, especially those that have embraced the “FAANG” (an acronym for Facebook, Amazon, Apple, Netflix, and Google that has also come to include Microsoft) trade this year. Combined, these six mega-cap stocks have had a median year-to-date return of over 34% prior to Friday’s sell-off and, because of their size, account for over 13% of the market cap of the S&P 500 and 42% of the NASDAQ. Some analysts are pointing to a note released on Friday by Goldman Sachs as the cause of the sell-off. In their research report, Goldman not only discusses the strong performance and size of the FAANG stocks but also the recent odd behavior of their stock prices. For example, for the past six months ending June 5, these stocks have exhibited lower volatility then any of the 11 GICS sectors, including the defensive consumer staples and utilities sectors. Further, FAANG stocks, since the U.S. Presidential election took place, have been positively correlated to bond prices, meaning that as rates rise, these stocks have fallen and vice versa – a relationship historically that has been the mirror opposite. This strange performance may mean that FAANG stocks are not only be included in growth and momentum strategies but also some strategies focused on low volatility.
This case is an important cautionary tale for investors and highlights the old adage that investors should “know what you own.” In many cases this may also mean, “know what your funds own.” A great deal of investors own FAANG stocks outright but may not appreciate the full exposure they have to this group of stocks resulting from the underlying holdings of their mutual funds or exchange traded funds (ETFs). If you would like an x-ray completed on your investment portfolio to better understand the underlying risk exposures you have overall, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
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Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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