Stocktake: Tech stock pain was well overdue

The Faangs, the tech stocks that have led this bull market higher, have had a torrid time lately. The Fang+ index – Facebook, Amazon, Apple, Netflix, Google, Alibaba, Baidu, Nvidia, Tesla and Twitter – took a battering last week, with Tuesday's 5.6 per cent fall representing its worst one-day performance in at least three years.

Many component stocks had their own individual woes – Facebook's data scandal and the accompanying regulation threat facing Twitter, Donald Trump apparently gunning for Amazon again, Tesla's fatal Model X crash and increased concerns over its financial stability. Still, when you're deeply overbought and overvalued, any fundamental catalyst will do. Many tech names – Apple, Microsoft, even Facebook – trade on relatively reasonable valuations, but others were held up by hype and hope. The Fang+ index had tripled over the last two years and traded on 65 times earnings. Fund manager surveys showed long technology was the most crowded trade in markets.

Even before the sell-off, the Leuthold Group’s Jim Paulsen was warning his popular-to-panned ratio – a measure of the price performance of wildly popular growth stocks (think tech) versus conservative, defensive stocks – was at levels unseen since the dotcom bubble. The subsequent reversal, Paulsen noted last week, was the biggest since the dotcom crash. Value investors might be tempted to say: about time too.

DON’T SHED TEARS FOR CFD INDUSTRY

Europe restricts leverage on CFDs to protect retail investors

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Are you getting a social welfare increase this week?

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A bad week for Facebook shareholders

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Me & My Money: ‘You have to pick the right time to haggle’

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Should "investors" be free to do the dumbest things? Some people aren't happy that the European securities regulator has clamped down on CFDs (contracts for difference), leveraged trading instruments that allow small traders to bet big fortunes. Now, the amount of leverage is to be capped – 30:1 for major currency pairs, 5:1 for stocks, 2:1 for cryptocurrencies – and traders can no longer lose more money than they put in. "Very nanny state", one "source" told the Telegraph. "Surely I have the freedom to spend my money as I see fit?" one amateur trader – a teacher who trades during the holidays – complained to the Financial Times. Still, French research shows up to 89 per cent of people lose money on CFDs. Cash promotions, aggressive marketing reminiscent of the online poker industry, minimum account balances of just €100, leverage of up to 500:1, lax controls (some years back, the FT reported how one person managed to open a CFD account using the name Michael Mouse) – indicates many providers have deliberately targeted the uninformed. Under pressure from regulators, the industry has cleaned up its act somewhat in recent years, but there are a lot of unscrupulous providers out there that resemble the infamous US bucket shops of old. As one professional trader told the FT, regulators are ultimately doing retail investors a favour, "whether they like it or not".

FICKLE MARKETS FRET ABOUT THE YIELD CURVE Markets can be fickle. Some weeks back, everyone was worrying the US economy might overheat and that 10-year bond yields would exceed 3 per cent. Now, everyone's worrying a recession may be on the horizon. Well, not everyone, but there's been much nervous chatter about the recent flattening of the US yield curve. The easing of growth concerns has resulted in 10-year yields retreating but two-year yields have hit their highest levels since 2008 because the Federal Reserve is expected to keep hiking rates. The flattening curve is a "potential warning", says Morgan Stanley, that the Fed risks "getting ahead of itself". An inverted yield curve – when the two-year trades above the 10-year yield – is a powerful recession indicator; it has predicted all five recessions over the last 40 years. However, we're not at that stage yet – the 10-year yield remains some 50 basis points higher than two-year yields. Over the last five recessions, says LPL Research's Ryan Detrick, it took an average of nearly a year for the curve to invert from current levels. The lag between inversion and recession is even longer – once inverted, it took approximately 20 more months until a recession started. Late-stage bull markets can be powerful: stocks enjoyed a median rise of 21.5 per cent over those 32 months, says Detrick. The flattening yield curve should be noted, but it's not yet a cause for grave concern.

S&P 500’S WINNING STREAK FINALLY ENDS

The S&P 500 entered 2018 on a run of nine consecutive quarterly gains. After a very panicky quarter, that run has ended. Does this presage further pain? For all the volatility, the price swings have largely cancelled each other out, with the S&P 500 ultimately experiencing an insignificant 1.2 per cent quarterly decline. There's nothing ominous about first-quarter falls – since 1980, when stocks dropped in the first quarter and the economy wasn't in a recession, the following nine months saw further falls on only one occasion. A little stoicism and gratitude might be appropriate, suggests Ritholtz Wealth Management's Ben Carlson. The S&P 500 has gained in 19 of the last 20 quarters, notes Carlson, adding: "If you're freaking out about the first three months of this year being negative, you don't belong in the stock market."