The Dow Jones Industrial Average fell 105.07 points, or 0.35% to close the day at 30,068. The S&P 500 fell 0.79% to 3672 and the tech-heavy Nasdaq Composite fell 243.82 points, or 1.94% to close at 12338. Qorvo (QRVO), which fell 5.6%, was the biggest loser in the S&P 500.
Why did the Nasdaq get smacked? â€œWe think itâ€™s more of a digestion of the [recent] gains,â€ Yung Yu Ma, chief investment strategist at BMO Capital Markets told Barronâ€™s. â€œItâ€™s not something thatâ€™s the start of a major trend. Thereâ€™s going to be some consolidation until these companies show a couple good quarters.â€
The Nasdaq-100 had gained 5.3% during a 10-day winning streak between November 24 and December 8.
Positively, the White House pushed out a fiscal stimulus offer of $916 billion, a package that would include $600 cash grants to households. It currently does not include $300 unemployment benefits, much to the chagrin of House Speaker Nancy Pelosi. Overall, the bill would act as a bridge for households and small businesses until vaccines are widely distributed. But the market has been pricing in that stimulus and the S&P 500 is up 3.7% since November 12, the start of a mini-rally in stocks after a brief pause. Stocks have gone nowhere in the past few days.
Moreover, valuations for S&P 500 companies are looking increasingly stretched; U.S. large-cap stocksâ€”trading at just over 22 times the next 12 months of earnings projectionsâ€”are currently sitting near their most expensive level in history, according to research from Glenmedeâ€™s Investment Strategy Team lead by Jason Pride. The currently high valuation level is partly because ultra-low interest rates encourage investors to take more risk in stocks over safe bonds, but Glenmedeâ€™s statistic also partly accounts for low interest rates and low inflation.
In the midst of the move out of large-caps, investors have been favoring small-caps, which tend to outperform when the economy is seen bouncing back from a recession. The Russell 2000 did fall 0.81%, but has been beating large-caps since September. Small-caps are trading at their 75th percentile of valuation historically, according to Glenmede, making them relatively attractive to investors.
Looking ahead, E*Tradeâ€™s managing director of trading and investing product Chris Larkin has a key takeaway: â€œThere is at least a little more room to run as investors rotate into beaten-down cyclical sectors like energy, and small-caps in hopes of recovery,â€ he explains. â€œBut that doesnâ€™t mean we can rule out volatility or even a correction in the near-term.â€
Write to Jacob Sonenshine at firstname.lastname@example.org