June 13, 2017 — Markets had cold feet last week with respect to high-momentum, technology-oriented positions that have contributed to a substantial run-up in equity values this year. Since Friday, June 9, the technology sector is down by 4.5% vs. -0.4% for the S&P 500. What goes up too fast often needs a periodic pause or correction. Much has been made of the appeal of the so-called “FANG” stocks (Facebook, Amazon, Netflix, and Google which were up 35%, 35%, 34%, and 27%, respectively, year to date through June 8).  Additionally, other tech-oriented investments like Apple, NVIDIA, and Tesla were up 35%, 50%, and 73%, respectively, over the same period.

The question of too far too fast comes to mind as the Russell 1000 Growth, which contains 34% technology, is up 15.6% year to date vs. the Russell 1000 Value at 3.8% over this same period. It should be noted that growth stocks underperformed value stocks by 5.7% in the fourth quarter of 2016, as the period post Trump’s win focused on the potential benefits to cyclical financials, energy, industrials, and basic materials companies during that period. Since the start of the year, less focus has been put on Trump’s agenda benefits benefiting near term and potentially not seeing any benefits from his programs at all—which led the market to a more subdued economic expectation and lower interest rates. In a slower growth environment, the FANG stocks can thrive without an economic tailwind and, hence, become more valuable. The question today is whether the Trump agenda is more likely to come to fruition in the foreseeable future, which we think would benefit the cyclical names that sold off year to date. If not, sticking with more dependable growth is probably the better answer that we think would make the recent selloff more of a buying opportunity.

The selloff has been only two days in the making but the volatility measure shows a significant increase as fear wins the day. Below is a five-year graph showing the difference between the VXN (NASDAQ volatility) and the VIX (S&P 500 index volatility). As you can see, the reading taken on June 12th reached a high for the historical five-year period, which indicates there is much more fear in the VXN than the overall market. 

NASDAQ (VXN) – S&P 500 (VIX) volatility difference

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Source: Bloomberg

Core narrative:

The fundamentals may be stretched on their valuations to some degree—some more than others—but we remain bullish longer term. Our recommendation is to stay overweight technology as the base fundamentals remain strong and valuation has corrected somewhat in this downdraft. It provides an opportunity for some to buy on near-term weakness as the march upward has been unusually consistent for the entire year.

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