The S&P 500 had its worst day on Thursday since June 11, with a decline of 3.5 percent, and the same large technology companies that have run the last rally were guilty.
One day after equities rose to another record high, Apple fell 8 percent, the worst fall since March. Amazon fell almost 5 percent, Microsoft more than 6 percent and Google’s parents, Alphabet, 5 percent.
William Delwiche, an investment strategist at Baird, a financial firm in Milwaukee, said investor optimism had pushed stock prices up – perhaps higher than investors were comfortable with, given the serious economic challenges still posed by the coronavirus pandemic.
“The market had come before itself and had come before the economy, and I think this is a small reflection of that,” Delwiche said.
Shares fell from the opening clock on Thursday, pulled down by technology companies that have significant fluctuations over the index by virtue of their size. What started as a small decline soon accelerated – partly due to some of the speculation and options that had helped send stocks up.
By the time the market closed, more than a week’s gains had been erased.
Investors have been optimistic about the technology companies, whose market dominance and online business models seem to benefit from the prospects of a home away from home. Before Thursday’s tumble, Amazon was up more than 90 percent this year, Apple more than 80 percent, Microsoft and Facebook almost 50 percent, and Alphabet almost 30 percent.
New investors’ eagerness to enter into these gains ended up contributing to Thursday’s fall.
The race to acquire technical shares has attracted millions of new small investors. Many of them have chosen not to buy actual shares, but instead to make option trades, which are mainly deposit amounts on where the share prices will go.
Such traders make these bets – for the most part they have been “talks”, or bets that the technical stock prices will rise – with option traders, who then have to hedge their risk. Traders who sell calls are actually so short, or are betting that the stock price will fall. To neutralize this risk, they often try to buy the underlying stocks as well, strengthening the stocks upwards.
But the system also exacerbates downturns: Analysts said traders accelerated on Thursday to increase efforts on falling stocks, which may have boosted sales.
“I think today for technical stocks, you see the momentum playing out – you have sales being chased by traders,” said Yousef Abbasi, director of US institutional stocks at StoneX, a brokerage firm.
Technical stocks have been a cornerstone in the recovery of financial markets since the end of March, when Federal Reserve bond purchase programs and lawmakers adopted the largest economic rescue plan in US history put a floor under collapsing financial markets.
Since then, the S&P 500 has increased by more than 50 percent, erasing all the losses seen during the chaotic days of February and March, when the index fell almost 34 percent, putting a share at the heart of what had been an 11-year-old bull run.
In recent months, the rally has accumulated and expanded as investors have focused on flickering life in the economy, including slightly better-than-expected profits and continued support from the Fed. There were also expectations that Congress and the White House would throw together another stimulus package that sent more dollars to small businesses and households that remained exposed to economic downturn.
At the same time, many analysts have warned that the stock market’s gains were increasingly detached from reality. The prospects for corporate profits and economic growth are far from rosy, and lawmakers in Washington have not been able to agree on another aid package.
While the reports on corporate profits for the second quarter of 2020 were solid, the company’s profits for S&P 500 companies are expected to be down to almost 20 percent this year. And recent economic updates have shown signs that the pandemic-related closures this year have created persistent problems for the labor market, a key issue for the US consumer-oriented economy. A recent report on the labor market due on Friday morning should provide further clarity on this point.
Widespread expectations of a new round of fiscal stimulus from the federal government pushed such concerns into the background. But consensus on a new round of government support has been difficult to find: Negotiations between the White House and congressional Democrats have stalled for several weeks.
The S&P 500 is up almost 7 percent for the year, but long-term uncertainty has the gains that are more vulnerable than they did just a few weeks ago.
“There is a long list of things for investors to worry about this autumn, from a full election, to the possibility of restarting schools without asking for a further increase in Covid-19 cases and further economic downturn,” he said. Scott Clemons, Chief Investment Officer for Private Banking at Brown Brothers Harriman, an investment bank.