Stock market bloodbath: Dow and Nasdaq plunge

Stocks erased all their gains after a huge bout of exuberance Wednesday, when the S&P 500 — the broadest measure of Wall Street — and the Nasdaq hit yet another record high. The Nasdaq had also climbed above 12,000 points for the first time in history Wednesday.

Around midday, all three major indexes had bounced back from their morning lows but remained sharply in the red. The Dow was off by 1.7%, or more than 500 points, and the S&P down 2.4%.

For one, the Nasdaq has been outperforming the other two major stock indexes — the Dow (INDU) and the S&P 500 (SPX) — for months. The rally has been going on for long enough that investors are now taking profit.

Even so, the Nasdaq remains up nearly 30% in 2020, still far outpacing its counterparts.

“Although there is no single driver for the weakness, it seems as if investors all of a sudden realized how overbought stocks are and sold. Someone yelled fire in a crowded theater and everyone left at once,” said Ryan Detrick, chief market strategist for LPL Financial, in emailed comments.

But there are also technical reasons for Thursday’s decline: As US-China relations sour, investors are moving money out of tech, which could get hit the hardest from a potential increase in tariffs.

“The Nasdaq is getting hit hard with the continued rotation into cyclicals and expectations big-tech will ultimately pay the cost to a further deterioration with US-Chinese relations,” said Ed Moya, senior market analyst at Oanda.

Stocks in cyclical sectors are also expected to perform better as the economy is recovering.

The Big Tech companies such as Amazon (AMZN), Google (GOOGL) and Microsoft (MSFT), all of which are part of the Nasdaq, have become the safe-haven investment of the summer. But investors have beginning to wonder when the rally will run out of steam, either because of increased regulation or because the economy as a whole picks up enough to void the need for safety picks altogether.

Given the summer rally, it’s “perfectly normal,” to see tech stocks readjusting a bit, Detrick said.

And even investors who are still faithful to their safe tech holdings have reason to be a little concerned: Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious diseases, told CNN Thursday that a Covid-19 vaccine by October remained “unlikely,” though it was possible.

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