US stock market hands back 2018 gains

The story behind the sell-off will be familiar to anyone who’s followed the market’s previous sharp sell-offs this year.

Heavy selling has returned to the US market, seeing a relatively steep decline on Tuesday (20 November).

The Down Jones industrial closed -2.21% down on the day, while the S&P 500 ended the day down by -1.82%. This puts both indices in negative territory year-to-date, with the Dow down -1.44% and the S&P 500 down by -2%.

The story behind the sell-off will be familiar to anyone who’s followed the market’s previous sharp sell-offs this year.

First of all, tech. While the sell-off reached beyond tech stocks, some of the heaviest losses were concentrated among so-called FAANG shares (Facebook, Apple, Amazon, Netflix and Google) that had previously propelled the market forward.

While Netflix and Amazon saw price declines above 1% on the day’s trading, worst hit was Apple, which fell by almost 5%.

“Peak-to-trough, Apple has now fallen from over $230 per share to around $180 in just a month and a half,” notes Anthony Gillham, head of investments at Quilter Investors. “We are talking about one of the world’s most valuable companies and most bought stocks in history so that is hugely significant.”

The sheer size of these firms has helped drag down the rest of the market. As Gillham notes: “Because the big tech firms now make up such a substantial share of total market cap, holders of the index are being punished proportionately  as the likes of Apple suffer a pullback.”

The sell-off in US stocks, says Gilham, shows a cooling off in sentiment around tech. “This year we have seen growth stocks and tech companies in particular rally as investors bet that their earnings will grow exponentially in the coming years,” he notes. Now, the market is doubting those expectations.

When it comes to Apple in particular, profit warnings from some of its suppliers have led investors to conclude that handset sales may be slower than previously expected, as well as fears that the US economy might be cooling off.

These fears surrounding the health of the US economy also fed into selling in other parts of the market.

According to JR Zhou, chief market strategist at Infinox, a FX broker, there has been a “realisation that the strength of America’s domestic economy is being rendered increasingly irrelevant by the continued weakness of its trading partners.

“With growth slowing badly in both the Eurozone and China, US momentum could soon hit a brick wall.”

Those fears, however, appear to be receding – at least for the time being. Futures contracts, at the time of writing, suggest US markets will make strong gains once trading starts (on 21 November).

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