Market Outlook

Is the Nasdaq tech sell-off finished?

The Nasdaq index had soared to an all-time high on 2 September this year, powered by the tech stocks that make up a substantial part of the index. Standouts include Apple’s [AAPL] share price, which has gained 57% this year, and Tesla’s [TSLA] impressive 345% increase. 

However, September saw this rally take a hard left as the Nasdaq experienced its worst week since March. While there is no single root cause for the sudden sell-off, the concern might be that the tech stocks which were driving the index higher have come in for a correction.

Does this represent a buying opportunity for investors willing to buy the dip, or should they be taking profits now?

 

What’s happening with the Nasdaq index?

A major pullback in tech stocks and other equities saw the Nasdaq close last week 10% off its 2 September peak, while the S&P 500 and Dow Jones index dropped 6.7% and 4.9% respectively in the same period.

However, the end of the sell-off could be in sight, at least according to Goldman Sachs and Deutsche Bank. According to Goldman Sachs’ David Kostin, the recent sell-off has matched a typical post-financial crisis sell-off, just at a faster pace:

“Despite the sharp sell-off in the past week, we remain optimistic about the path of the US equity market in coming months. Since the financial crisis, the typical S&P 500 pullback of 5% or more has lasted for 20 trading days and extended by 7% from peak to trough, matching the magnitude of the most recent pullback if not the speed.”

“Since the financial crisis, the typical S&P 500 pullback of 5% or more has lasted for 20 trading days and extended by 7% from peak to trough, matching the magnitude of the most recent pullback if not the speed” - Goldman Sachs’ David Kostin

 

Over at Deutsche Bank, analysts pointed to the put-call ratio — a metric looking at the number of bearish to bullish options contracts — that had hit the bottom of its ten-year range. However, post-correction this seems to have normalised, suggesting some stability in the Nasdaq index.

 

Where next for the Nasdaq index?

While the market might rebound, investors should expect more volatility in an extraordinary year that could get even more extraordinary. Tensions between Washington and Beijing will continue to affect tech companies, while a second wave in the coronavirus could see markets plummet once again.

Then there’s the upcoming US presidential election, an event that has historically seen movement in the stock markets. The week following President Trump’s election on 6 November 2016, the Nasdaq rallied 3.4%, while the S&P 500 saw a 4.6% jump.

“Investors still have to contend with the upcoming macro event of the US presidential elections,” said the Deutsche Bank strategists. “With a likely unprecedented volume of mail-in ballots, prospects for volatility enduring post-election day are high.”

“Investors still have to contend with the upcoming macro event of the US presidential elections. With a likely unprecedented volume of mail-in ballots, prospects for volatility enduring post-election day are high” - Deutsche Bank strategists

 

Calling where the Nasdaq index will end 2020 is an almost impossible task. The recent gains over the summer have seemingly defied the wider economic reality, while the coronavirus has introduced an almost unprecedented degree of uncertainty.

Still, for investors who believe the recent pullback is truly over, there could be some bargains out there. Since the Nasdaq’s 2 September peak, Apple’s [AAPL] share price is down around 1%, Alphabet’s [GOOGL] 1.5%, Facebook’s [FB] 7% and Tesla’s [TSLA] 8.5%.

Last week, AJ Bell Investment Director Russ Mould summed up the decision facing investors:

"Whatever the reason ... tech and growth investors have to decide whether this is a chance to buy on the dips — yet again — or a call to lock in what could be substantial profits."

“Whatever the reason ... tech and growth investors have to decide whether this is a chance to buy on the dips — yet again — or a call to lock in what could be substantial profits” - AJ Bell Investment Director Russ Mould

 

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