September 08


By David Nelson, CFA CMT

The recent run up to all-time highs has been on weak breadth and narrow participation. While most equity sectors were hit hard last week it was technology that took the brunt of the selling as investors headed for the exits dumping high beta secular growth stocks. It’s hard to know just what the trigger was and maybe that isn’t important. 

Asset Class Returns from Peak

The growth to value trade continued as investors headed for the exits dumping the dance partners that drove the post covid returns. According to Goldman the Nasdaq put in one of the largest 2-day declines in the last 30 years. The above is taking place with asset manager tech positions close to historical highs. Add historically low put/call volume and rumors of large funds increasing option activity and you have just about everything you need for a correction.

Bears will start to make comparisons to the bubble of the late nineties. As a veteran of that war I can tell you there’s little resemblance. While valuations are stretched most of the big cap secular growth stocks are profitable. That was not the case in 2000.

While a snap back rally for the NASDAQ could easily come at any moment, if statistical reversion to the mean still has a place in return analysis, I suspect the overall growth to value trade still has legs.

Key for that statement to be true will be continued good news fighting Covid and a continuation of the re-opening state by state. Anything that disrupts that dynamic will send investors scrambling to the growth side of lifeboat.

As I said in Thursday’s call, growth will remain the long-term winner given our information-based economy, but even online technology needs a helping hand from what I call essential businesses. To a tech wonk essential business means AI, cloud, software as a service, semiconductors and semi equipment in that order.

Amazon can pile on all the technology it wants to market and sell goods online but, in the end, some boring manufacturer has to design the product, someone has to make it and a transport company has to deliver it. Oh yeah, and some bank likely has to provide the financing.

The best thing that can happen to markets right now is for a little more balance in equity returns. If Tech continues to dominate the landscape to the exclusion of all others we’re just being set up for an accident.