Nasdaq erases 2020 losses as tech stocks shake off harrowing lockdowns

New York — As harrowing as the pandemic has been, with the outbreak putting millions of jobs at risk and threatening to spur the worst recession in nine decades, just as shocking has been the ability of technology stocks to shake it off.

You’d barely known anything was wrong in the world if your only guide was the Nasdaq Composite Index, which after its fourth straight advance on Thursday erased its year-to-date losses that at the depths of March swollen past 20%. Propped up by companies whose online and automated businesses have proved bulwarks amid a stay-at-home scourge, the gauge is up 30% in two months.

The all-weather resilience of companies such as Amazon.com and Regeneron Pharmaceuticals has made the Nasdaq the envy of markets, at a time the average US stock is down 18% and forecasts for everything from the economy to earnings to the virus’s trajectory remain hopelessly scattered.

That it has occurred as older industries languish — banks, retailers and energy companies, for instance — and  is raising questions about the kind of world investors see emerging from the lockdown.

“What does the new economy start to look like? To me, this makes the case for tech,” said Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers, which oversees $1-trillion. “Everything we think about has to revolve around technology because it has made all this stuff available for us. This just highlights the idea that we need tech and it needs to be one of the core positions in your portfolio.”

Combined with strong balance sheets, big tech’s online focus has kept the companies intact while much of the economy reels, repudiating sceptics who said their high valuations would leave them vulnerable when the bull market ended. The rally gained momentum late in April after solid earnings from Google parent Alphabet, Facebook, Microsoft   and Tesla  — which make up more than a fifth of the index. The advance was delayed last week when Amazon.com and Apple spooked investors with cautious comments about the coronavirus pandemic’s long-term impact.

While big tech has shouldered the load, the Nasdaq Composite is also home to 700 health care and biotechnology companies that have stoked investor interest as they search for ways to treat the coronavirus. Three of the top five performers in 2020 are biotech firms, and all of them are up more than 400%, including Genprex   and Vaxart.

The S&P 500 and Dow Jones Industrial Average, which track broader swathes of the economy, both remain lower for the year by at least 10%. But they, too are well off their March lows even as investors contemplate mass layoffs and one of the largest economic contractions in history. Investors are focusing on news of coronavirus curve flattening and economic reopenings. Unprecedented monetary and fiscal policies have also buoyed sentiment.

The furious seven-week rally has given way to hand-wringing over surging valuations that appear unjustified in an economy that contracted by 4.8% last quarter and looks set to shrink by more in the current period.

Companies in the S&P 500 now trade at about 20 times expected earnings over the next year, higher than at the market peak in February. The Nasdaq Composite is even more expensive, trading at almost 28 times forecast profits in the next 12 months — the highest in 15 years.

“I don’t think any full sector is bulletproof to this,” Dunkin Allison, director of portfolio management at Delegate Advisors, said by phone. But “technology is in a position, given the nature of their business models, to be more defensive, experience less pain and also come out of this a fair amount stronger than they were, say, six or 12 months ago.”

The tech dominance has been so strong that it has drawn some warnings about breadth — or what share of the market’s components are doing well. One particular measure that compares performance of the median S&P 500 constituent with the broader benchmark shows breadth is at one of the narrowest levels of the past 40 years, according to Goldman Sachs. Bank of America analysts late last month pointed out that participation in the rally has been weaker than the rebound off the late-2018 lows.

“Eventually, narrow market breadth is always resolved the same way,” Goldman strategists including David Kostin wrote in a May 1 note to clients. “Often, narrow rallies lead to large drawdowns as the handful of market leaders ultimately fail to generate enough earnings strength to justify elevated valuations and investor crowding.”

Bloomberg

Source: businesslive.co.za