Big tech stocks are continuing their Icarus-like flight path, and more sharp declines for them are pulling Wall Street lower in early Tuesday trading.
The S&P 500 was down 1.9%, highlighted by the 2.7% tumble for tech stocks within the index. Apple sank 2.9% and Microsoft fell 2.8%.
The Dow Jones Industrial Average was down 474 points, or 1.7%, at 27,658, as of 9:57 a.m. Eastern time. The Nasdaq composite, which is full of many tech stocks, dropped 2.5% and is down 8.5% since Wednesday’s close.
Tech stocks had been the darlings of Wall Street, even through the pandemic, on expectations that they can continue to deliver strong profit growth almost regardless of the economy and global health. Tech stocks in the S&P 500 are still up nearly 25% for 2020 so far, and Amazon has rocketed 73%, even when unemployment remains high and much of the economy is limping ahead.
Analysts say a flurry of buying activity for stock options of Big Tech companies goosed the gains even further recently. With certain kinds of stock options, investors can make huge profits on a stock, without having to pay for its full share price, as long as the stock’s price keeps rising. If enough of these kinds of stock options are getting sold, it can create a buying frenzy for the stock that accelerates the gains even more.
But all that activity can unwind quickly and send prices tumbling if momentum turns, which is what happened last week. Apple stock dropped 3.1% for just its second weekly loss in the last 14 weeks.
The trigger for the turnaround may have been expectations that longer-term interest rates will rise, according to strategists at Morgan Stanley. Low rates often act like steroids for stocks, encouraging investors to pay higher prices for stocks relative to corporate profits, which benefits high-growth stocks in particular.
The yield on the 10-year Treasury has returned to 0.66%. That’s down from 0.72% late Friday, but it’s notably higher than the 0.53% it was offering at the end of July.
Tesla has been one of the brightest examples of Big Tech’s furious movements and surged 74.1% in August alone. Its slump on Tuesday came with disappointment that it won’t be joining the S&P 500 anytime soon. The company behind the benchmark index announced the inclusion of several companies in the S&P 500, including Etsy. Some investors thought Tesla would be among them, which can create huge bouts of buying as index-fund investors include the stock in their portfolios.
Teradyne and Catalent will also join the S&P 500 on Sept. 21.
Tuesday was the first day of trading for Wall Street after Monday’s closure for Labor Day.
Beyond the tech stock slump, other worries are also hanging over the stock market, which had been setting record highs just last week.
Pessimism is rising that Democrats and Republicans in Washington will be able to find a deal to send more aid to unemployed workers and an economy still struggling amid the pandemic. Investors have been largely assuming that a deal would eventually pass, but recent talks between government leaders have yielded no progress.
Riki Ogawa at the Asia & Oceania Treasury Department at Mizuho Bank in Singapore warned that plenty of other uncertainties remained, such as President Donald Trump’s comments about “decoupling” the U.S. economy from China, as the presidential campaign heats up.
The relationship between the world’s two largest economies has been on edge for years, and all the uncertainty threatens to exacerbate the global economy’s already shaky standing.
“We appear to be short on clarity,” said Ogawa.
Energy stocks had some of Wall Street’s sharpest drops as the price of oil tumbled. Apache and Devon Energy both lost 8.3% after benchmark U.S. crude sank 7.8% to $36.67 per barrel. Brent crude, the international standard, lost 5% to $39.89..
But the losses were widespread across the market, with 95% of stocks in the S&P 500 lower.
European stock markets were sinking, following modest gains in Asia.
France’s CAC 40 fell 2.1%, Germany’s DAX lost 1.7% and the FTSE 100 in London slipped 0.8%.
Japan’s Nikkei 225 added 0.8%, South Korea’s Kospi rose 0.7% and Hong Kong’s Hang Seng edged up by 0.1%. Stocks in Shanghai rose 0.7%.