Why Investors Should Not Be Worried By Yesterday's Tech Losses

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Tech investors were rattled yesterday as the sector led the market down, posting big losses in several high-profile stocks. The obvious reason for that was that the leaders of the major social media companies are currently on Capitol Hill, facing questions and criticism from concerned a Congress.

That might explain why Twitter (TWTR) dropped around six percent and Facebook (FB) gave up over two percent, but it doesn’t help to explain other weakness in the sector such as Netflix (NFLX)’s six percent decline on the day. Obviously, something else was driving the selling, and understanding what that might be could give investors a clue as to how to respond.

First it is important to note that over the last year, the tech sector has led the S&P 500, showing an overall gain of over 28.8%. In many ways, that makes sense when you consider what has been worrying the market. As President Trump keeps ratcheting up tariffs, particularly on China, trade has been the dominant concern.

It is, however, hard to place a tariff on the things delivered to consumers by many tech companies, so the sector has been an area to hide from those worries while positioning to benefit from strong growth when the issues are resolved.

On the other hand, the sectors that are hit head-on by trade wars, such as consumer staples, industrials and materials, have generally underperformed during the same time. Again, that is unsurprising given the headline news, but if we look at underlying economic fundamentals in America it would seem likely that the selling in those areas has been overdone.

Unemployment in the U.S. is at multi-year lows, while GDP growth is showing definite signs of speeding up. That could be a recipe for trouble down the line in some circumstances, but with a return to productivity growth it is less of a concern that a cause to celebrate. Importantly, consumer confidence and spending have also been on the rise.

So, the obvious question is why are the sectors that serve those consumers lagging the market?

The aforementioned trade worries are a part of that, but there is another thing to which I often refer that has driven the disparity between sectors like tech and more traditional parts of the economy: the tendency of markets to overshoot. Once a narrative takes hold among traders and investors it can be extremely powerful, often powerful enough to push thing beyond their logical endpoint and that seems to have happened here.

Yes, trade disputes will hurt manufacturing and consumer staples more than tech in the short term, but they are an overall risk to growth, so tech is not immune from their potential effects. They are also not certain, or even likely, to be permanent or particularly long-lasting, but in some cases stocks in the lagging sectors are being priced as if trade wars were here to stay.

To put it simply, the current narrative has been overplayed and a rotation has looked overdue for a while.

So, when we look at yesterday’s tech selloff in that light, it is a lot less concerning than some seem to think. Markets are inherently cyclical and in a fractal manner, meaning that there are a lot of small cycles within the larger ones. Still, stock market history has been consistent in one way. Even as those mini and major cycles cause concern in the short-term, stocks trend upwards. What investors should be looking for therefore are signs that the cash generated by the tech selloff goes looking for opportunity elsewhere.

We are already seeing that this morning as FB, TWTR et al continue lower while the Dow Jones Industrial Average is showing modest gains. The big drops in tech yesterday do not therefore seem to be a cause for concern, but rather a natural correction after a period of outperformance, and before long will be another opportunity to buy tech stocks at a discount.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Technology , Economy , Investing Ideas , Stocks , US Markets
Referenced Symbols: TWTR , NFLX , FB

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Martin Tillier

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