Someone suggested Tuesday that “selloff” seemed like something of a misnomer.
Intermittent weakness and a burgeoning tech pullback might more aptly be described as a healthy development considering stretched discretionary positioning and valuation extremes. It’s the tried-and-true “cleansing” spin. “Cleaner” positioning will lay the foundation for the next move higher, we’re told.
There’s usually some truth to that. But you’d be forgiven if you’re at least slightly concerned about tech. Monday was bad stateside and it rippled outwards on Tuesday. The Hang Seng Tech Index fell nearly 5% at one juncture before trimming declines. It’s now down some 30% from its February highs (figure below).
At times, losses for the gauge have been unrelenting. In Q1, shares suffered the knock-on effects of the developed market bond rout, which weighed on duration-sensitive equities and richly-valued tech names.
But it’s not just the macro backdrop. Chinese tech is also laboring under Beijing’s antitrust crackdown, which began in earnest late last year with Jack Ma and hasn’t let up since.
Meituan is the latest target. It fell for a tenth consecutive session Tuesday, after a consumer advocacy group criticized the company. Not helping matters, CEO Wang Xing appeared to take a pot shot at Beijing via a poem posted on social media. “Wang later deleted it and said he used the poem in reference to the company’s competitors,” Bloomberg noted, adding that “the topic with hashtag #MeituanSharePriceSlump# has been read more than 33 million times on popular Chinese blogging platform Weibo.com.”
European tech was similarly beset Tuesday, falling more than 2% for the second straight day (figure below).
Pandemic winners were hit especially hard, as were chip stocks and semiconductor equipment manufacturers.
It’s the same story over and over again. Inflation concerns have prompted market participants to reassess the odds of “early” policy tightening and higher bond yields, both of which would be detrimental to inflated valuations. Fears of a severe de-rating have been exacerbated by the notion that anyone looking to rotate from “slow-flation” winners to sectors and styles seen benefitting from the global recovery will use tech as a source of funds.
Market-based measures of inflation expectations are rising quickly and the commentary increasingly revolves around the implications for valuations. “Alphabet shares are trading at eight times revenue, the highest in more than a decade, while Facebook’s price-to-sales multiple is nine, nearly twice that of the average Nasdaq 100 company,” Bloomberg’s Katherine Greifeld wrote Monday, on the way to pointing out that QQQ short interest now sits at an eight-month high.
“The fund has bled roughly $425 million so far in 2021… on track for its first yearly outflow since 2016,” the same linked article reads.
“The Nasdaq 100 has returned just under 4% year to date, while the S&P 500 has returned 12% and the Dow more than 14%,” JonesTrading’s Mike O’Rourke wrote, noting that “it’s not often one sees the Dow on pace for a 45% annualized return and the Nasdaq 100 simultaneously on pace for only an 11.4% return.”