Tech Stocks Are Getting Hammered. Here’s the Logic Behind the Rout.

The tech rout just won’t let up.

After dropping 2.6% on Monday, the Nasdaq Composite looks set to drop another 1.4% Tuesday morning, with Apple, Amazon, and Facebook shares off by more than 1%.

But this is less a stock market problem than a tech problem. The Nasdaq, home to many richly valued tech stocks, is down 4% in May, while the Dow Jones Industrial Average, home to old economy stocks such as 3M, is up 2.6%.

The reason is simple. Old-economy stocks tend to be economically sensitive, and with the global economy emerging from its Covid-coma, cyclical businesses are booming like Zoom did amid global lockdown.

Investors are only now catching on to that fact. They’re playing catch-up, and that means they need to sell tech to buy old economy. Selling, though, begets selling, and that can turn a run-of-the-mill pullback into something more painful.

Consider Cathie Wood’s ARK Innovation ETF, home to the highest growth of the high growth tech sector. It’s down 14% in May alone, has fallen in nine of the past 10 trading sessions. Fifty-three of Wood’s 58 stock holdings are down over that span.

One of Wood’s winners over the past month is heavy duty truck maker Paccar, an old-fashioned cyclical stock.

Sometimes, it’s just a case of being in the wrong place at the wrong time.

Credit to Al Root at Barron’s

Published May 11, 2021 8:07 am ET