US techs on tax tenterhooks

Psyche

What started as a wobble of Apple shares could yet turn into a broader and deeper stock market sell-off. Or at least that’s the worry expressed by some market participants this month as shares in the world’s biggest listed company set their latest record high, then promptly sold off. And that was in reaction to Apple’s latest and supposedly game-changing iPhones.

Investors like to see themselves as attuned to subtle fundamental events of import that may, in hindsight, be interpreted as when ‘the trend’ turned. A new Apple handset which sparks a market sell-off would be a fair candidate for such an event, though in market psychology, the tendency may well be a form of participation mystique.

Either way, a sell-off that left Apple some 12 percentage points off its 1st September new all-time high, also weighed on the large swathe of influential technology and internet stocks the Cupertino, California, giant is closely associated with in investors’ minds. The S&P 500 Information Technology index is still the U.S. benchmark’s best performing index though it’s worth noting that Apple has yet to recoup its loss and remains down for the month, as shown below. It’s clear that ‘technology’ sectors have broadly underperformed the wider market this month.

Figure 1 – Rebased chart: Apple Inc. vs. NASDAQ, S&P Info Tech and S&P 500

Source: Thomson Reuters and City Index

Tax cuts, or cut the FAANGS

The current market dynamic is reminiscent of a similar gyration during the summer, when the Nasdaq slid almost 5% month-on-month into the beginning of July. Then, as now, wariness on valuations of market leaders AKA the FAANG, AKA Facebook, Apple, Amazon, Netflix Google owner Alphabet, et al, was an underlying factor. This time, confirmation that real rates will notch higher from here after the Fed unveiled tapering plans, is also part of the calculus for becoming bearish on ‘growth’ plays. The rationale is the supposed trigger of rotation out of riskier assets with premium valuations into lower-rated sectors with fair prospects. Again, financials—on the face of it—fit the bill. Obviously, the glacial nature of Fed tightening plans should be the rational focus. But with stocks optimistically turning higher on Wednesday ahead of a President Trump speech to Congress on tax reform—even amid continued scepticism over the ability of his administration to enact them—short-term sentiment in the market is clearer than most other motivations. If the White House and Republican supporters disappoint (again), it’s easy to see how major U.S. indices could trend lower in the weeks ahead.

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