| After a three-day rout that has seen the US Nasdaq 100 index sell off by almost -11%, fear is in the ascendant. At this point a reality check may be a valuable exercise. Whatever the proximate trigger for the slump, the deep sell-off has been confined mainly to large-cap tech stocks, and is not generalized across the market. Moreover, there are reasons to believe the picture for the US economy and earnings is set to improve, possibly by more than investors anticipate. With the latest data encouraging, and the Federal Reserve hinting at further easing, it is possible the slide in tech stocks is not the beginning of a broader market sell-off, but rather the start of a rotation into positions more oriented for economic growth. To put the slide into perspective, it may help to look at how often sell-offs of comparable magnitudes have occurred before across the different US market indexes. Clearly the rout is highly significant for big-cap tech stocks; only four times before since March 2009 has the Nasdaq 100 sold off so far so fast (see the chart below). But away from the narrow tech sector, the declines are far less unusual. The S&P 500 has fallen by -7% in three days on 20 other occasions over the same period. And the Russell 2000 has experienced falls of -5.5% over three sessions no fewer than 68 times. For the small-cap market, the move of the last few days is historically insignificant. Similarly, within the S&P 500 index, the sell-off in the tech sector was large. But the falls in other sectors were much smaller. Looking at the broad equity market, there is not yet the evidence to conclude that the sell-off raises a red flag for overall equity performance, or for the US economy as a whole. |
