A strange thing happened on the way to the biggest post-election surge in modern stock-market history. On Wednesday, while the S&P 500 was tacking on $600 billion of fresh value, most of its members fell.
How the index still managed to gain so much altitude is the story of the week and of the year: a reigning oligarchy of market behemoths, soaring past everything else.
Yesterday, as the big American equity benchmark rallied 2.2%, some 270 of its constituents were nursing losses. Some lost a lot. Three big financial firms slid more than 10%, while utilities tumbled to one of the worst days in three months. While a measure of equilibrium was restored Thursday, at the top, the leader board looked the same.
It’s a trend that will surprise no one who has been paying attention to markets in 2020: gains concentrating in companies that have circled like buzzards over virtually every rally of the pandemic age: the Faang bloc. Somehow, some way, even before the votes are counted, megacap technology is coming out on top. Again.
“It looks like we’re back with the winners of Covid are going to win,” said Kim Forrest, chief investment officer of Bokeh Capital Partners.
The S&P 500 surged 1.95% Thursday, bringing its two-day surge to 4.2%. The tech-heavy Nasdaq 100 again outperformed, adding 2.6% for a gain of 7.1% over the pair of days.
Investors are reverting to what works, a yearlong trend in which the very heft of companies like Apple Inc. and Microsoft Corp. schleps the whole market past a damaging pandemic and deep economic downturn. Cherished for their balance sheets, beloved by consumers for their online and automated products, the Fangs have been insulated from the coronavirus fallout. Total third-quarter profits for the group rose 2.6%, compared with an expected 11% drop for the rest of the S&P 500, data compiled by Bloomberg Intelligence show.
It’s true that they briefly fell out of favor in the weeks leading up to the election as investors calculated that Democratic control of Washington could spur spending and a jolt to flagging economic growth. Now those views are being frantically retooled. With stimulus less of a certainty, bets are being placed on havens against sputtering growth.
Other forces have coalesced in the Faangs’ favor. Overhanging concerns about higher tax rates and increased regulation from a Joe Biden administration have dwindled. With a potentially split Congress, many strategists are seeing this week’s rotation as a reflection of the removal of potentially higher capital gains taxes. Some may have sold out of tech, the thinking goes, to avoid paying those higher levies next year.
“Some investors may have been sidelined before the election to avoid a tax-sale stock drop, or perhaps to buy the dip,” wrote Chris Low, chief economist at FHN Financial. “Either way, the strategy is irrelevant now and they piled back in.”
With inflation-fueling stimulus in doubt, bond yields have also moved lower since the Nov. 3 vote. That’s a boon to tech stocks, too, as investors gravitate to high-growth assets with long duration cash flows. The Federal Reserve signaled Thursday that it will hold rates near zero for a long time still.
“In a very low interest environment, you want to own companies that are growing. Those companies have put up the best growth, the best free cash flow on the market and, in my opinion, they’re going to keep growing,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas. “If you don’t have a government that’s going to be riding them and breaking them up and taxing them into oblivion or taxing shareholders that own them, megacap tech’s going to keep rolling.”
It was just last week that solid quarterly earnings reports from a majority of the Fang stocks failed to inspire share-price gains. An index that includes Facebook Inc., Amazon.com Inc., Netflix Inc., Microsoft, Alphabet Inc., Apple dropped 4% last week. The group is now up close to 10% in three days, the most in five years.
Victoria Fernandez, chief market strategist for Crossmark Global Investments, says their adverse post-earnings reactions were due to election uncertainty. Removal of that ambivalence paves the way for tech shares to resume their upward trend again.
“As we hopefully get past that over the next couple of days, we can see tech settle in and continue to have that climb higher,” she said in a phone interview. “It’s difficult to not have any tech in your portfolio.”
This week, the winner-take-all mentality in markets is back. On Wednesday, when the Nasdaq 100 surged more than 4%, both the small-cap Russell 2000 gauge and an equal-weight version of the S&P 500 barely budged. Using Russell 1000 indexes, value suffered its worst day versus growth since 2001. Relative to the S&P 500, it was the worst day for regional banks on record, including the financial crisis.
And in another showing of how lopsided Wednesday’s rally was, it was the first time in at least six decades that the S&P 500 jumped more than 2% as more volume flowed into declining securities than advancing ones on the New York Stock Exchange, according to SentimenTrader.
Meantime, exchange-traded fund investors rushed into Invesco’s QQQ -- which tracks the tech-concentrated gauge -- adding close to $2.7 billion in the biggest one-day inflow in nearly a month. The fund is on pace for its best year of inflows in two decades.
Still, not everyone is convinced the massive tech rally is substantiated. Max Gokhman, Pacific Life Fund Advisors’ head of asset allocation, still sees antitrust concerns over big technology firms persisting, no matter the final election outcome.
“The Nasdaq rally is I think a little over-enthusiastic,” he said by phone. “The Nasdaq rally is something I would be fading at this point.”
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