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Technology has been the most consensus, as well as the one of the best-performing trades of 2017. That combination is making investors nervous going into year-end and they are taking profits. After briefly reaching a 3-day high on Monday, the Nasdaq 100 slammed back down to finish near its lows. The Dow also finished lower on Monday, but a strong showing for financial firms helped it close well off Friday’s lows. The passing of House and Senate tax plans have boosted demand for bank stocks at the expense of tech.
In more normal market conditions, the best-performing trade over the last 12-18 months will not be the top performer over the next 12-18 months because eventually smart money moves into a trade with lower valuations. However in this ultra-low volatility environment, momentum is a strong force to overcome. Tech has the momentum and earnings growth behind it.
After a swoon in tech stocks in June, there were similar calls for a more long-lasting shift out of tech and into energy as oil prices recovered. The Nasdaq 100 has gained over 14% off its July lows when those calls were made. This time the sector chosen to rotate into from tech is financials because of US tax reform. However, most economists think the Republican tax plan will have little impact on short-term economic growth, so lending is unlikely to pick up substantially to support financial firms.
In our view, calls for a switch from tech to financials are premature. The idea that tech could be in for a bigger correction does have more merit with year-end positioning so in the short-term, a break below 6,250 in the Nasdaq 100 could lead to a bigger correction to 6100 then 6000.
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