- The GOP tax bill has injected volatility into a stock market that had been seeing some of its most muted price swings on record.
- Tech stocks have been on the wrong side of these price swings as investors have rotated out of them and into industries that have lagged in 2017.
- Despite the rotation, the increase in volatility should be a boon for investors seeking opportunities in the market.
For months, equity investors have been awaiting the return of volatility to the market. It now appears as if that time has come.
In the end, it was the Senate’s passage of the massive GOP tax bill that whipped up price swings, throwing the USstock market for a loop for several days running as investors position around the areas expected to benefit most. And no other sector has felt the brunt of this newly hectic trading to the extent that tech has.
The renewed price movements haven’t been pretty for the group. Viewed as the stock market’s foremost beacon of strength for much of 2017, tech companies have felt pressure as traders have sold out of expensive positions to finance purchases of lagging sectors, like financials and telecom. This so-called rotation has largely played out under the surface of major stock indexes like the S&P 500, leaving the benchmark at the whim of intra-industry crosscurrents.
This dynamic was at play on Monday, with the more tech-heavy Nasdaq 100 index declining 0.4%, while the S&P 500 climbed 0.5% and the Dow Jones industrial average surged 1%. It mirrored price action on Friday, when the Nasdaq dropped by twice as much as the S&P 500, even after the latter dropped as much as 1.5% on an intraday basis.
The elite FANG contingency – consisting of Facebook, Amazon, Netflix, and Google – has served as a microcosm for tech-sector volatility over the past week. Last Wednesday, the group saw $US60 billion in market value erased, the most in five years, before rallying 1% the following day.
These price swings have manifested in the price action for the CBOE Volatility Index, or VIX, which is commonly referred to as the stock market’s fear gauge. The VIX has spiked 11% since the start of last week, while trading volume for futures on the index reached a record high on Friday.
So why has tech become such a lightning rod for fluctuations as the stock market heads into a new volatility regime? First off, as previously mentioned, tech stocks have reached nearly unprecedented valuations. Second, the sector already has the third-lowest tax rate of any industry, according to data compiled by S&P Global.
That means they’re less likely to gain from a corporate tax cut – and investors are recognising that by pulling money and allocating it elsewhere. That’s more than offsetting the potentially positive effect of a one-time repatriation tax holiday, which is expected to give a boost to mega-cap tech companies.
In the end, while tech has weakened as volatility has picked up, price swings are ultimately a good thing for investors. The more fluctuations there are, the more opportunity there is to profit from inefficiencies and dislocations – the very things that hedge fund managers and other large institutional traders pride themselves on being able to find.