WARNING SHOT ON TECH

Last week featured a sharp correction in technology stocks, which fell by 10% at the peak of Friday’s profit-taking. This ‘healthy’ adjustment emerged after the Nasdaq 100 (a US tech-heavy index) became heavily overbought following an almost unbroken rally of more than 80% up from March lows. August 2020 will go down in the annals as the best month for equities since 1986 whereas it is usually a bit of a dud.

Tesla’s market capitalisation has practically exceeded the value of the MSCI world index of carmakers. Last week it also reached 10 times that of General Motors and double that of Toyota, the largest car manufacturer in the world, which sells over 10 million vehicles every year.

The profit-taking therefore seems legitimate. Yet the market is not showing any signs of panic. Treasuries have hardly budged. Nor has the dollar. Instead, what we are witnessing is rotation into sectors that had fallen by the wayside since the onset of the pandemic, such as travel & leisure and financials, both of which were able to make headway in a tumbling market at the end of the week.

Central banks are still backing financial markets unconditionally, guaranteeing ultra-low rates in the long term, thus enabling equities to sustain a consistently attractive risk premium.

National governments are jostling with each other to come up with a vaccine more quickly than was initially expected, which is leading to a brighter economic picture and could fuel rotation into more cyclically oriented stocks. It would be prudent for investors with a lot of tech stocks on their hands to diversify risk by rebalancing their portfolios.

The macroeconomic picture is still complicated. Although the unemployment rate in the US fell last month from 10% to 8.4%, part of the improvement was due to seasonal adjustments calculated by the Department of Labor. In the private sector, job creation was below expectations with 450,000 new positions added in August compared to the expected 950,000.

The US presidential election is fast approaching, and even if most polls give a lead of around 8 points to the Democrat candidate, bookmakers now show the two candidates neck and neck. It ain’t over till it’s over…
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