When banks started going belly up, positioning in bonds turned on a dime. Forget inflation. The country is spiraling toward a recession. Yields plunged, higher interest rates were priced out. And over in the stock market a celebration ensued.
(Bloomberg) — When banks started going belly up, positioning in bonds turned on a dime. Forget inflation. The country is spiraling toward a recession. Yields plunged, higher interest rates were priced out. And over in the stock market a celebration ensued.
Several reasons have been proffered as to why, in the midst of banking stress that even in a best case is likely to squeeze lending and slow growth, the Nasdaq 100 has surged to what is poised to be its best week in four months. A myopic focus on lower interest rates is one. Hedge fund machinations are also contributing. A spate of bailouts clearly soothed nerves on Thursday.
But another force may also be at work, one familiar to anyone who lived through the equity market twists that defined the months and years around the Covid-19 pandemic. When paralyzed with anxiety, investors want safety. And the shelter represented by the erstwhile Faang block of quasi-monopoly and mostly debt-free technology businesses is what they’re reaching for again.
“You start thinking about companies that have strong cash flows, fortress balance sheets, shareholder-friendly management — companies making the right decisions about expenses at the right times,” said Art Hogan, chief market strategist at B. Riley Wealth Management. “All of that plays into Meta, into Microsoft, into Apple.”
Once dubbed the stay-at-home trade, the strategy took hold during the lockdown year. With pandemic restrictions biting, about a third of the S&P 500’s members fell in 2020, but the index still managed to gain 16%. The reason was heavy weightings in technology stocks and specifically gains of 50% or more in the likes of Amazon.com Inc., Apple Inc. and Netflix Inc., which pushed the Nasdaq 100 to its biggest rally in a decade.
Now, with the bond market trying to decide if the likeliest outcome of banking turmoil is a recession or full-blown credit crisis, evidence of the same dynamics are at work. Large-cap growth has dominated since anxiety started to spiral a week ago. The Nasdaq 100 is up 4.9% versus the S&P 500’s 1.1% advance and no gain in the Dow Jones Industrial Average. Small caps tracked by the Russell 2000 Index are down 3% over the stretch, while the Stoxx Europe 600 has loste even more.
Microsoft Corp., Apple, Amazon and Nvidia Corp. accounted for roughly 60% of the Nasdaq 100’s gains since Friday. The NYSE FANG+ Index has added 10% this week, which puts it on pace for its best five-day stretch in a year.
Alphabet Inc. alone has added more than $120 billion in market value in an 11% advance this week. Microsoft’s 11% gain pushed its market capitalization up by more than $200 billion.
“The fear has been that this crisis is going to have a contagion effect — I think that’s not going to happen, but that’s been in the mindset, that we’ll have a recession, there’ll be a dearth of growth,” David Donabedian at CIBC Private Wealth US, said. “That’s when investors start to look at growth stocks — when growth is scarce, go for the companies that have the growth.”
The most immediate catalyst for the advance is big speculators — sudden moves by hedge funds that were positioned for one economic environment and got another, says Bob Elliott, chief investment officer of Unlimited Funds. Managers who had hitched their fortunes to trades that might do well in a rising-interest-rate world — value companies and international equities — have been rotating into once-shunned groups that are the market’s new relative winners.
“It’s not your typical defensive like a staple or health care — it’s more the concept of, OK, what has real rock-solid stability,” Hogan said. “Large-cap tech gets you there. It’s the companies that really have moats around their business.”
That’s also meant an exodus from banks, industrials and energy companies, coupled with short-covering or just buying in technology and consumer services stocks.
The tech sector, with cumulative cash and free cash flow above $1 trillion along with abundant low-cost capital, among other factors, “likely has defensive protection from a persistent recession as well as contagion from the Silicon Valley Bank crash,” wrote Bloomberg Intelligence’s Robert Schiffman and Abigail Marshall in a note. Free cash flow remains a point of strength for the sector, giving companies “ample financial flexibility
“Led by Apple, Microsoft, Alphabet and Amazon.com, the sector faces lower relative-spread volatility and limited ratings downside through 2023, our scenario analysis suggests,” they said.
–With assistance from Katie Greifeld.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.