It has been a downright scary month for stocks, especially the Nasdaq.
Despite Tuesday’s rally, the tech-heavy basket is on track for its worst month since November 2008, when it fell more than 10 per cent during the financial crisis.
That’s quite the fall from grace for a group of stock market darlings, that have done much of the the heavy-lifting during this bull run. Amazon AMZN is down around 20 per cent for the month, Google’s parent company Alphabet GOOGL is down around 9 per cent. That’s despite the fact both are bouncing back today.
So why have investors been gripped by fear? There are a number of factors that have spooked them.
“With general nervousness and a risk off trade on the heels of China tariffs and high valuations, we are seeing investors sell their winners and tech has seen the brunt of this weakness over the last month,” Daniel Ives, Wedbush Securities, told Yahoo Finance Canada.
Some Nasdaq companies, Amazon in particular, have sky-high valuations by just about any measure. Ives says investors got their hopes up way too high, and the companies just didn’t deliver.
“We believe tech valuations got over their ski’s as so far earnings season especially for FAANG names has been underwhelming which has been a bad 1-2 combination for stock,” says Ives.
That doesn’t mean Nasdaq companies will turn into pumpkins at midnight though. The beaten down tech stocks could once again be the bells of the ball in the months ahead.
“We expect the FAANG names to show a significant rebound over the next 3-6 months as these stocks have gotten punished and the sell-off is way overdone in our opinion,” says Ives. “We believe cloud, cyber security, and tech stalwarts such as Apple and Microsoft are the clear winners to focus on heading into 2019.”
Fears of ripple effects from China
The boogie man lurking in the shadows could be China and a long-drawn out trade war with the U.S.
Tariffs will hurt the United States, the consensus is that China is in worse shape,” Ophir Gottlieb, CEO, Capital Market Labratories, told Yahoo Finance Canada. “While that sounds like a potential positive, it is in fact still crippling for the U.S. stock market as a number of companies here see China as their great growth bastion, like Apple and Starbucks to a name just two bellwethers,” says Gottlieb.
That doesn’t mean the Nasdaq won’t have another kick at the can though. Much of the bad news may already be baked into the cake, and another round of quarterly earnings is just around the corner.
“Valuations in many stocks have reached appropriate downward equilibrium realities and now we will be back to watching earnings, valuations, inflation, and the economy,” says Gottlieb.
Canada faring only a little better
The TSX is down about 6.5 per cent in October, the biggest monthly drop since September 2011.
Canada’s big banks and pot stocks have been the biggest drags, accounting for 31 per cent of the decline.
The TSX has been largely shielded from October’s tech-wreck. That’s because at 3.9 per cent, tech stocks make up barely a sliver of Canada’s benchmark stock index.