Wall Street suffered its worst day since June on Thursday, as investors dumped high-flying technology stocks on concern about their astronomical valuations on a day fresh economic data signaled a long and difficult recovery.
The Nasdaq led the declines, with the biggest drags from companies including Facebook Inc, Apple Inc, Amazon.com Inc, Microsoft Inc and Google-parent Alphabet Inc.
The five stocks, deemed strong bets because of solid cash positions and continued growth despite the coronavirus crisis, also account for roughly a quarter of the S&P 500′s market value and have driven the stock market’s narrow technology-led recovery from the pandemic lows hit in March.
While losses were tamer in Toronto, some of the Canadian market’s best performers this year were also hit with a bout of profit-taking.
Many market observers suggested the pullback in stock prices, especially for the U.S. tech giants, was overdue.
“Think about the mounting number of risks the market has been shrugging off over the last couple of months here,” said Emily Roland, co-chief investment strategist and John Hancock Investment Management. “We’re 60 days away from the election. That may be an area where investors are getting a bit spooked.”
“Looking at the data today, the market has had the ability to power higher and hasn’t paid any attention to a macro environment which, yes, is improving which is encouraging, but the economy remains fragile here,” she added.
Earlier in the day, data showed the number of Americans filing new claims for unemployment benefits fell more than expected last week, but remained extraordinarily high. The closely watched monthly payrolls report is set for Friday
Separately, a survey showed U.S. services industry growth slowed in August, likely as the boost from the reopening of businesses and fiscal stimulus faded.
The market pullback came a day after the S&P 500 and the Nasdaq closed at record levels and the Dow came within 1.5% of its February peak, powered by fiscal and monetary support hopes for a swift economic recovery. Valuations in some tech stocks have grown to historic highs; for instance, both Apple and Microsoft trade for about 40 times earnings, compared to 26.83 for the broader S&P 500.
On the Toronto Stock Exchange Thursday, all sectors fell, led by a 4.5 per cent drop in technology. Shopify Inc., Canada’s tech darling that earlier this year surpassed Royal Bank of Canada as the nation’s most valued stock, fell 5.11 per cent - leaving it still up 155 per cent year-to-date. Ballard Power Systems fell 10 per cent, also barely putting a dent in its nearly 100 per cent rally this year.
After a relatively sedate summer that saw stock prices generally trend higher, there were unmistakable signs of market unease on Thursday. The CBOE Volatility Index, or VIX, spiked more than 23 per cent to levels not seen since June.
The VIX started trending upward on Wednesday, on a day when the S&P 500 gained 1.54 per cent to fresh records. It was a move that struck economist David Rosenberg as peculiar.
“We have seen no fewer than 70 other sessions in the past five years just like the one we saw yesterday in terms of a headline market advance of roughly 1.5%, give or take. Not once did the VIX ever rise on those days. Not once. Not one time,” Mr. Rosenberg said in a note.
“That is just too weird, and one can be forgiven for wondering if this portends something big happening before too long.”
The S&P 500 has only been this expensively priced 0.4 per cent of the time over the past 70 years, according to Mr. Rosenberg. And on the charts, the S&P 500 has also rarely been this far above its 200-day moving average.
“When you look at multiples, sentiment, leverage and the technical picture, this is a bubble of historic proportions,” said Mr. Rosenberg, one of the Street’s best known bears.
Still, some investors seemed unconcerned in the face of the sell-off.
“The prevalent attitude in the market now is that this is a healthy correction,” said Mike Zigmont, head of trading and research at Harvest Volatility Management in New York.
“(Investors) are in love with tech stocks and it’s going to take more than this for them to fall out of love with them.”
The S&P/TSX Composite Index fell 249.06 points, or 1.49 per cent, to 16,448.90
The Dow Jones Industrial Average fell 808.17 points, or 2.78 per cent, to 28,292.33, the S&P 500 lost 125.84 points, or 3.51 per cent, to 3,455 and the Nasdaq Composite dropped 598.34 points, or 4.96 per cent, to 11,458.10.
The declines marked the biggest single-day percentage declines for the Nasdaq and S&P 500 since June 11. It was the largest one-day percentage drop for the Dow since June 26.
Even with Thursday’s drop of 8 per cent, Apple is still worth just over US$2-trillion.
With files from Reuters
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.