Stocks Tumble as Tech Sector Falls Sharply
Mohamed El-Erian warned recently that the tech-stock rally was a sign of excessive risk-taking.
The U.S. stock market suffered its biggest decline since June on Thursday as the S&P 500 fell 3.5% and the VIX index, aka the fear index, climbed to a 2 ½-month high, breaching its 200-day moving average. The Nasdaq fell almost 5%, its biggest drop since March.
Multiple reasons circulated for the big drop, which was led by a sharp decline in tech stocks —the sector that had been leading the recent rally to record highs. Apple shares closed down about 8%; Google, almost 6% and Tesla, off 9%.
Previous “explosive moves” in those stocks had worried Mohamed El-Erian, chief economic advisor at Allianz and the former CEO of Pimco. Their rallies were signs of excessive risk-taking in the stock market when “corporate and economic fundamentals have yet to reflect a sustained and convincing recovery from COVID-related damage,” explained El-Erian in a Financial Times op-ed on Monday.
El-Erian also noted that “sophisticated investors” were expressing caution with the use of derivatives, which contributed to the jump in the VIX. Retail investors will be vulnerable when the downturn comes, El-Erian wrote.
Other potential reasons for the market drop: the July trade deficit swelling to $63.6 billion, its highest level in 12 years; Friday’s upcoming jobs report (following a slightly better than expected weekly jobless claims report); and the upcoming long Labor Day holiday weekend, prompting profit taking.
In addition, yet another Federal Reserve official expressed the need for additional fiscal relief to sustain the U.S. economy. Chicago Fed President Charles Evans told a virtual meeting of an Indiana Chamber of Commerce branch on Thursday that the absence of additional federal aid or inadequate relief “presents a very significant downside risk to the economy today.”
Fed Governor Lael Brainard expressed similar sentiments earlier this week as well a need for the Fed to provide even more monetary stimulus for the economy and possibly more explicit guidance about its near zero interest rate policy. The Fed recently revamped its policy framework to allow for slightly above-target inflation to support the job market.
Liz Ann Sonders tweeted Thursday that a new survey of managers and executives from the Conference Board “suggests a long, uncertain road ahead,” with 35% noting that they don’t know when their businesses will reopen and only 14% expecting to return to the workplace by the end of this month.