8 September 2020
The record-breaking run of share prices of big US technology companies came to an end last week, with the Nasdaq stock index (heavy with US tech companies) dropping almost 5% after months of remarkable gains on Thursday – then fell further on Friday.
Markets around the world have felt the effects of this sharp reversal. Friday saw stock indices in Australia, Hong Kong and China all drop, while the STOXX Europe 600 Index fell almost 2% despite strong performances from some European banking stocks.
Large technology companies have been some of the few winners of COVID-19, enjoying a surge in their share prices in recent months and reporting strong earnings while traditional businesses continue to struggle. Part of this can be attributed to how they are benefitting from the new working patterns and changing consumer behaviour that has come from the pandemic.
US share prices are still higher than they were before the pandemic took hold however, despite last week’s losses. The S&P 500 remained over 5% higher than at the start of 2020, and almost 35% higher than at its lowest point in the year – during the height of COVID-19 infection rates in the US.
Why we shouldn’t fear another ‘dotcom drop’
The fall last week has sharpened recent questions that investors have been asking themselves: are the increasingly high valuations of the COVID-19 technology winners a cause for concern? And does last week’s sell-off signal the start of a market correction?
The reversal may be reminiscent of the dotcom bubble bursting 20 years ago, but this isn’t a helpful comparison for several reasons.
Firstly, the sell-off in US tech firms hasn’t spread to other assets, like bonds and currencies, which held up relatively well last week. Secondly, it wasn’t a market event that triggered the fall, which is what happened in March this year when countries around the world began lockdowns to stop the spread of the virus. Lastly, large tech companies are generating strong profits.
“While this correction may have further to run, and we continue to think that tech stocks will fare less well than most other sectors as the economic recovery continues, we don’t expect that a collapse in tech stocks will drag the entire market down for an extended period in the way that it did in 2000–02,” suggested Capital Economics.
COVID-19 may be putting plenty of pressure on share prices, but there are also signs of encouragement, believes Mark Dowding of BlueBay Asset Management, which co-manages the St. James’s Place Strategic Income fund.
“From one perspective, markets look rosy, anchored by low borrowing costs, a steady recovery in some of the worst-hit sectors and just in need of some natural consolidation after a strong run. However, you could equally argue that the data points towards a mixed picture – economic divergence between sectors and countries is increasing and until there is a vaccine, the threat of new local lockdowns lingers.”
US unemployment down as election looms
Good news has come in the form of US jobs data however, which showed that first-time claims for unemployment benefits had dropped to their lowest level since mid-March.
COVID-19 will continue to make markets volatile over the coming weeks and months, but the upcoming US election will also be a source of ups and downs. Last week, an index that tracks investor expectations of volatility pointed towards an expected spike around the date of the election. Recent polls have shown a tightening in the competition as the race for the Whitehouse becomes more combative, and investors are bracing themselves for a choppy autumn.
This week, meanwhile, marks the renewal of trade talks between the UK and the EU. Time is running out to reach an agreement, and UK spokespeople have been re-signalling their willingness to accept a ‘no-deal’ outcome.
Last week’s events were definitely dramatic, highlighting the importance of two tried-and-tested investment principles. Firstly, investors need to focus on their long-term goals and not get discouraged by short-term swings in the market.
Secondly, diversification – investing across a wide range of assets – is the best way of ensuring your investments aren’t too closely tied to the performance of one single company or sector. If you’re only invested in a handful of areas, a sharp drop in a company’s share price is alarming, but investors who are spread across a range of investments will be better insulated from such market movements.