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The stock market’s first trading session of the year is always closely watched as an indication of what lies ahead. The theory is that investors benefit from holiday-induced reflection after a couple weeks away from the office. If that’s the case, early predictions of 2016 being tough on share market investors need to be taken very seriously. On Wall Street last night, 2015’s darling Fangs – Facebook, Amazon, Netflix and Google – were hit hard, as were US banking shares. Part of the sell-off followed through from a rout in Shanghai came where after growing concerns that China’s economic downturn is deeper and faster than Mr Market thought possible. But there’s also a belated realisation that the US market’s headline performance in 2015 was distorted by a handful of stocks. And if those four revert to some kind of mean in 2016, watch out. – Alec Hogg
By Anna-Louise Jackson
(Bloomberg) — It’s hard to imagine more beloved U.S. stock trades at the start of 2016 than going long bank and technology companies. Or, for now, a more painful one.
Shares of financial and information-technology companies in the Standard & Poor’s 500 Index tumbled as much as 3.1 percent, their biggest losses in four months, as another China-induced rout spread through U.S. equities. Financials closed down 2.1 percent, the most in the index, while tech stocks recouped about half of their losses to end 1.6 percent lower. Confidence cratered and investors turned skittish about the most economically sensitive long bets amid renewed concerns of slower global growth.
The fifth-straight month of slowing in Chinese manufacturing triggered a selloff that halted Shanghai trading before the U.S. market opened. While the Nasdaq Composite Index fell as much as 3.2 percent, the most since August’s correction, some of 2015’s favorites were much harder hit.
The so-called “FANG” stocks — Facebook Inc., Amazon.com Inc., Netflix Inc. and Google’s parent Alphabet Inc. — slumped 3.6 percent after falling as much as 4.7 percent, as all four members fell to the lowest in at least two weeks. Meanwhile, all but four companies in the 87-member S&P 500 Financials Index tumbled, led by declines of at least 3 percent for JPMorgan Chase & Co. and McGraw Hill Financial Inc.
“Today is a knee-jerk reaction to the weaker data out of China. The sector reaction seems to be one of nervousness,” said Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, which has about $42.5 billion in assets. “If you believe that the U.S. economy is going to turn south, then the selloff in tech and financials makes perfect sense. We do not share that view.”
Financial stocks have gained favor in the wake of last month’s interest-rate hike, the first in nearly a decade. Investors chasing earnings growth have been enchanted with tech stocks, helping to push the group to a 15-year high a month ago. The two groups had rallied at least 76 percent in the past four years.
These two industries are favorites among strategists, including Goldman Sachs Group Inc.’s David Kostin, who recommends an overweight allocation to each, as does BMO Capital Markets Corp.’s Brian Belski and Scotia Capital Inc.’s Vincent Delisle.
The long-term fundamentals for both industries remain positive, but negative sentiment surrounding these stocks persists partly because both groups were at the center of the last two U.S. recessions, Belski said by phone.
“People tend to pick on financials and technology,” he said. “This whole hatred and mistrust of Wall Street and corporate America really started to occur in earnest in 2001 and that’s thanks to technology. It’s only seen a crescendo with the financial crisis.”
One day of weakness won’t impact Belski’s longer-term outlook particularly in what he sees as a “transition” year for the stock market. The proficiency provided by tech companies is buoying the operating efficiency of U.S. companies, while financial stocks will benefit from improving net interest margin in the new era of higher rates, he said. “If you’re selling financials and technology today, it is a very bad decision.”
Today’s broader rout started the year off with a thud after a lackluster 2015 for many investors. Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee, asked whether the bull- market rally could be “sputtering out.”
“The general tone to start the year is one of very tepid expectations for 2016,” he said. “That’s remarkable because typically you see a bullish tone to start a year. At least you have recently.”
For Gayle, a disappointing U.S. government jobs report for last month, due on Friday, would do more to color his outlook than one day of weakness. He maintained an overweight recommendation on the technology and financial industries, betting that the economic expansion will continue through this year and further buoy these stocks.
“We’re going to take a day like today in stride.”
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