Market Overview

4 September 2020

Wall Street Dropped on Major Profit Taking Just To Grow Again?

U.S. stocks have made a nasty surprise on Thursday to a densely populated and cold bullish camp, which was sleeping the peaceful sleep that knew no waking for several weeks. However, this time the share prices forced some sobriety on that snoring crowd while many investors were staring with wonder watching the high tech Nasdaq 100 index going down by more than 600 points for one trading session. Futures quotes for the main U.S. technology sector index crashed falling almost 200 points more during the first Pacific hours.

But even this depth happened to be almost 6% higher than the initial levels of the beginning of August. So, yesterday's "mini-collapse" ate up less than a half of the month's gain, or approximately 30% of the whole rise of this summer. Therefore, at least from a formal point of view , this seemingly powerful and fast movement is technically quite an ordinary downward correction, when the market let some steam off by taking large-scale profits left and right on the most expensive assets on the spur of the occasional moment.

In absolute terms this looks slightly discouraging, as only Apple Co lost $180 billion in market value in one day, according to Barron's, and it was the biggest 24 hour loss for any company ever. "A rotten day for technology shares... but still leaves Apple with a market cap of well over $2 trillion," Barron’s remarked, as for the first time Apple's capitalisation touched $1 trillion just two years ago. Finally, Steve Jobs' creation overcame this $1 trillion bar only in September 2019. So, the capitalisation of the already very huge IT conglomerate has more than doubled in less than a year, even if to count the loss of this week. Apple shares are still up 65% since January, and up 127% over the past 12 months.

As for yesterday's record fall  for Apple, Barron's article added: "big numbers are fun. The previous one-day loss record was a weird one. Back in October 2008, sports car maker Porsche revealed that they had gained control of a majority of voting shares in Volkswagen. That set off a massive short squeeze, which propelled Volkswagen shares 82% higher to briefly become the most valuable company in the world — at $348 billion, meagre by today’s standards. Things normalized a bit the next day, and VW stock lost 44%, or $153 billion in market value". It's curious to know that the Apple’s one-day loss on Thursday was even bigger than the individual market value of 470 other companies in the S&P500 broad market index list, or than the total capitalisation of the bottom 37 companies of the S&P500 combined together. 

The largest daily market value loss before was with Facebook in July 2018, after the second-quarter report with earnings and sales matching the expert consensus. The same moment Facebook CEOs warned that the revenue growth and profits would decline significantly because of the Cambridge Analytica scandal with data leak of the users. Facebook dropped 19% the following day, losing over $119 billion of the market's capitalisation just at the opening. It may even seem strange, but yesterday Facebook stocks kept a stiff upper lip and lost only 3.76%, from $302.60 to $291.12 per share.

Given the relatively large absolute scale of yesterday's decline in all composite indices in correlation with the S&P500 broad market index still remaining well above pre-coronavirus peaks of February, it would be more reasonable to assume that the correction is unlikely to continue for more than a few days. Of course, a market is a market, and a variety of trajectories is possible. However, the important argument is the visible absence of new highlighted excuses for the investment community to worry too much about the speed of economic recovery. Markets may be somehow out over real economic skis, but the economy's speed hasn't got any faster or slower in the recent days.

The Europeans markets were not so noticeably declining, as they synchronized with the U.S. markets' drop more by inertia, but the European shares did not grow so steeply up to fresh record as many American shares performed, so that it had no big sense for the investing crowd to fix profits in European stocks. This fact also speaks more in favour of the lack of global economic troubles, which could be too big to cause all the indices to fall too much and too long everywhere on different continents.

Recent U.S. data showed yesterday that the number of Americans filing new claims for unemployment benefits fell more than expected last week, by 881,000 jobless claims after more than 1 million of initial claims just a week before. The non-farm payrolls report today hasn’t made a big correction to the general jobs picture. Again, the August non-manufacturing report by the U.S. Institute of Supply Management (ISM) showed just a modest decline to 56.9 from 58.1. Technically, this is the lowest level since June, but 56.9 points is still a very high value of the indicator that means fast improvement of the business climate in the service sector. Thus, there was no one or two direct obvious reasons for the fall yesterday, and the movement could be a simple coincidence of several random factors. It could have happened one day, and it happened yesterday, simply because many stocks have soared too high in a too short period of August.

“(Investors) are in love with tech stocks and it’s going to take more than this for them to fall out of love with them,” said Mike Zigmont, head of trading and research at Harvest Volatility Management in New York. Sebastian Leburn, senior portfolio manager at Boston Private in Florida, also commented for Reuters that the decline was “just a rotation” out of technology stocks: “I don’t think it’s anything ominous.” But, there are, of course, more disturbing points of view out there. “Think about the mounting number of risks the market has been shrugging off over the last couple of months here,” Emily Roland, co-chief investment strategist at John Hancock Investment Management remarked. “We’re 60 days away from the election. That may be an area where investors are getting a bit spooked. Looking at the data today, the market has had the ability to power higher and hasn’t paid any attention to a macro environment which, yes, is improving which is encouraging, but the economy remains fragile here”.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus
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