Ominous Signs for the Stock Market
Stock Market perilous as Tech companies stumble

Stock market prediction is, indeed, a perilous game. While trends over the past months can serve as a basis for predicting its growth or slump, sudden regulations or major news announcements can result in massive movement across the charts. This has occurred previously during the 2000 recession, which has embedded dark images of stock market traders plunging to their deaths from the high floors they called their ‘work haven’. The past week has seen the shares of major tech companies’ plunge and has prompted several investment pundits to raise the question of an imminent financial meltdown in the near future.

The hold of tech companies in the stock market has grown in the past decade. The top 5, nicknamed the FAANG group, consists of Facebook, Amazon, Apple, Netflix, and Google. They undisputedly hold the largest weightings in major equity indexes and exert significant influence on the broader market. The past week saw Facebook’s stock dip 24%, amid issues over privacy and content. On 27th July, 2018, it accounted for a loss of $119 billion – the biggest single-day loss in Wall Street History. Twitter stocks also dropped by almost a similar value and were largely accredited to a loss of investor sentiment over the number of fake accounts in the social media giant.

The shares of Netflix, the video streaming website, also witnessed a dip of 21% since their June 21 high. The drop in Netflix shares was a result of the company not being able to hit the estimated number of subscribers on their website, falling short of over 1 million. An increasing number of bad quality shows on their website has propelled customers to opt for other video streaming services or direct-DVD purchases.

Analysts from Goldman Sachs have been quick to predict the severity that might occur as a result of the drop in share prices of tech companies. Their analysis is based on the concept of ‘breath’ – the market’s heavy dependence on just a small handful of stocks. Their numbers show that only 10 companies have accounted for 62% of the 7% year-to-date return in the S&P 500. The worrying part, is that 9 out of these 10 companies fall in the tech sector. They claim that in the past, the decline of breath has preceded market and economic meltdowns. David Kostin, the firm’s chief US equity strategist, wrote that, “From a fundamental perspective, narrow market leadership typically reflects narrow earnings strength, which is often a symptom of a weakening operating environment”.

Mike Wilson, Morgan Stanley’s chief US equity strategist reported that the tech sector is showing signs of “exhaustion”. According to the firm, both momentum and value factors have moved in a downward trend since May 2018.

John Hussman, the president of the Hussman Investment Trust, successfully managed to forecast the market collapse of 2000 and 2007-2008. He predicts an ominous sign, stating that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.

As the U.S. Congress charges ahead with proposals that would result in more tech regulations, investors are slowly losing faith in the tech industry dominated market. Stocks generally flourish when market participants are willing to make risky bets. The current downfall of tech shares, coupled with issues of privacy and government regulations, are bad signs for equities, as investors are less prone to take on risks.