Anything For You All: The tech selloff reveals a major shift in how Wall Street is positioning for the future

The tech selloff reveals a major shift in how Wall Street is positioning for the future

Tech stocks, favored for their earnings growth, are underperforming more defensive utilities stocks.
The weakened ratio of both sectors reflects a softening in investors' growth outlook.

The recent sell-off in tech stocks suggests that investors are thinking about growth differently.

The returns of the S&P 500's technology sector have more than doubled the benchmark index's over the past year. In contrast, utilities, a defensive sector that investors like for its indifference to the economic cycle and regular dividend payments, fell nearly 3% over the same period.

A ratio of both sectors now shows a reversal that's not been this sharp in years.

The ratio of tech versus utilities stocks is a metric that's tracked by Jim Paulsen, the chief investment strategist at Leuthold Group.

He told Bloomberg last week that the ratio's rollover resembled the pattern seen as the dotcom bubble expanded in the late 1990s. Paulsen observed that trading behavior was repeating itself: investors were flocking to all the popular tech stocks while shunning "conservative alternatives" like utilities.

But that's recently switched, amid a slew of news that's given investors worry about big tech companies. Notably, regulators are scrutinizing Facebook for how the private data on its platform is used, while Tesla's getting slammed after a downgrade from Moody's and an investigation into a fatal crash involving one of its cars.

Put differently, the popular momentum strategy of chasing market winners on the way up slowly started to unravel.

Right on cue, Bank of America Merrill Lynch's March fund-manager survey released last week Tuesday showed investors were "stubbornly long" global stocks, banks, and tech stocks while betting against bonds and defensives. Also, they said "long FAANG + BAT" — betting on the growth of the largest American and Chinese tech companies — was the most crowded trade.

Many of these funds have seen their favorite stocks such as Facebook and Amazon get burned.

Here's David Rosenberg, Gluskin Sheff's chief economist, writing on Tuesday's market action (emphasis ours), after the NYSE's FANG+ Index suffered its largest one-day drop ever:

"The sector rotation also is very fascinating. Growth stocks are now rolling over in a material way and the forced selling out of ETFs will compound the situation. The FAANG stocks are really getting hit, as are the once high-flying semiconductor stocks. All in, the S&P 500 Tech sector got clobbered yesterday, the Financials slid 2% and Consumer Discretionary dropped 1.9%. But not only did the uber-defensives outperform, but were positive on an otherwise brutal day! The Utilities soared 1.5%. Telecom rallied 0.5%. And Staples eked out a a 0.1% gain. Utility stocks outperformed Transports by an incredible 320 basis points — in a clear sign that the stock market is downgrading its growth outlook. Small Caps sagged 2%. Not encouraging signposts for those trading the market from the bullish side." Read »