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Weekly Market Digest: Stocks Fall As Big Tech Slides

A lot happened over the last week with wildfires continuing to rage on the west coast, perhaps the strangest smoke-filled apocalyptic skies ever seen over the Bay Area, the NFL officially kicking off its Covid-era season, and the U.S. commemorating the anniversary of 9/11. But all of that had little to do with the stock market, which ended the week lower as large technology stocks continued their slide. Recent unemployment figures also pointed to an economy continuing to struggle, with no signs of agreement on an additional government rescue package. International developed stocks were slightly up for the week, as were bonds and gold.

Weekly Returns

S&P 500: 3,341 (-2.6%)
FTSE All-World ex-US (VEU): (-0.1%)
US 10 Year Treasury Yield: 0.67% (-0.05%)
Gold: $1,950 (+0.8%)
EUR/USD: $1.184 (0.0%)

Major Events

  • Monday – Labor Day.
  • Tuesday – GM announced it took an 11% stake in electric truck startup Nikola.
  • Tuesday – AstraZeneca paused its Covid-19 vaccine trials after a participant came down with an unexplained illness.
  • Tuesday – New mortgage originations reached $1.1 trillion in the second quarter amidst record low rates, while delinquencies were also sharply higher.
  • Wednesday – Luxury goods producer LVMH announced it would back out of its planned $16.2 billion acquisition of Tiffany & Co.
  • Thursday – Senate Democrats blocked a slimmed down relief bill proposed by Republicans.
  • Thursday – Citigroup announced Jane Fraser will succeed Mike Corbat, becoming the first female CEO of a large Wall Street bank.
  • Thursday – New weekly unemployment claims came in worse than expected, with continuing claims increasing to 13.4 million.
  • Friday – Many around the U.S. commemorated the 19th anniversary of the 9/11 terrorist attacks in 2001.

Our take

As we’ve pointed out before, this market recovery has been dominated by a handful of the largest companies in the U.S., primarily growth and technology stocks. Some of the narratives fueling this exponential surge are that these are the only firms positioned to handle a pandemic, or that these companies are now so large they will just gobble up any new competitor and further cement their dominance. Regardless of the reason, their stock performance suggests many believe they will dominate in the decades to come, if not longer.

This is irrational, in our opinion, and we believe these stocks have entered speculative bubble territory. History shows that once companies become the largest in the market, they tend to underperform on a forward-looking basis. Moreover, we’ve reached extreme concentration levels with the Technology and Communications sectors now making up almost 40% of the S&P 500. Their combined weight is now higher than it was in 1999 at the peak of the dotcom bubble, and much of the recent run up has been driven by pure valuation expansion, not earnings growth.

But as is the case with all bubbles and frothy momentum trades, they have the potential to end violently. We had a small taste of this over the last couple weeks with the Nasdaq Composite (a mostly technology focused index) falling more than 10% in just three days from its high on September 2nd. That’s an official correction, and it was the fastest correction on record for the index. Tesla (TSLA) has been another head scratcher. Despite its inexplicable meteoric rise this year, it lost more than a quarter of its value since late August.

We’re not saying the mega cap growth and technology trend has officially ended—it could just as easily resume its upward march. But the violent pullback shows how quickly it could reverse when the music eventually stops. It’s a stark reminder that proper diversification remains paramount.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brendan Erne serves as the Director of Portfolio Management at Personal Capital. After several years as an equity analyst covering the technology and communication sectors, he joined Personal Capital in 2011, just before its official launch to the public. He helped create and manage the firm’s investment portfolios and build out the broader research team. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
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