Quickening Retreat From Tech Sinks Market


U.S. stocks suffered their biggest decline in more than seven months Wednesday, as investors accelerated their retreat from fast-growing technology stocks in favor of shares that have been overlooked.

Major indexes have started the fourth quarter on their weakest footing since the beginning of 2016, and the swift fall has some investors wondering if this is a brief stumble or an overdue reckoning for U.S. stocks after months of outperforming global markets.

The rotation out of tech and other growth stocks—among the most popular trades of the year—to so-called safety stocks, such as utilities companies, was sparked in part by the recent jump in government bond yields and the Federal Reserve’s bid to tighten monetary policy.

But there have been other warnings signals that made investors nervous. Recent data has showed a slowdown in both housing and auto sales, both of which are closely watched indicators of U.S. economic health. Even more concerning: trade tensions between the U.S. and China appear to be worsening.

The result: A simultaneous selling of 2018’s biggest stock-market winners.

Heading into the fourth quarter, there was a lot of common positioning, particularly in large U.S. tech stocks, said Andrew Slimmon, senior portfolio manager with Morgan Stanley Investment Management. “If everyone is on one side of the boat and they suddenly realize this, everyone would scramble.”

The S&P 500 tumbled 3.3% Wednesday afternoon, its fifth consecutive session of declines and longest losing streak in nearly two years. The Dow Jones Industrial Average dropped 827 points, or 3.1%, at 25604, falling 4.4% since notching its all-time high a week ago. Both indexes registered their biggest loss on a percentage basis since Feb. 8.

All 11 sectors in the S&P 500 slumped Wednesday, with technology stocks down more than 3%. Other growth sectors including consumer-discretionary and communications shares posted big declines as well. The tech-heavy Nasdaq Composite dropped 2.5%, extending its declines for the month to 6.3%. The index is suffering its worst start to a fourth quarter since 2008 when it fell 21%.

The recent selloff has sent highflying consumer tech companies like

Netflix
Inc.


NFLX -8.38%

and

Amazon.com
Inc.


AMZN -6.15%

down more than 10% since the start of the fourth quarter, and Google parent

Alphabet
Inc.


GOOGL -4.63%

down more than 5%. It’s not just big-name tech companies; smaller companies have also struggled, with semiconductor companies, as measured by the PHLX Semiconductor index, down 2.9% on Wednesday.

As those stocks have stumbled, investors have rushed into utilities stocks, which are generally considered safer in a volatile environment. Those shares rose 0.5% in the S&P 500 Wednesday, bringing their gains for the month to 3.6%.

Investors’ bet on tech companies with strong earnings growth has been a crowded one in 2018, according to Ann Larson, managing director of quantitative research at AllianceBernstein. Her firm identifies crowded trades by looking at the top positions of active managers, which stakes they have been building over the past several quarters, and which names have a high proportion of “buy” ratings from bank analysts who cover the companies. The model also considers how well an investment has done compared with the rest of the market.

In the third quarter,

Facebook
Inc.,


FB -4.13%

Amazon,

Microsoft
Corp.

and Alphabet were among the stocks that most frequently appeared in the largest 10 holdings of hedge funds, according to Goldman Sachs. By another measure of concentration, global fund managers have identified bets on the FAANG-BAT trade of Facebook, Amazon,

Apple
Inc.,


AAPL -4.63%

Netflix and Alphabet as well as Chinese firms

Baidu
Inc.,


BIDU -3.28%

Alibaba Group Holding
Ltd.


BABA -5.75%

and

Tencent Holdings
Ltd.


TCEHY -4.45%

as the most crowded trade identified by investors for eight straight months, according to a September survey by Bank of America Merrill Lynch.

For most of 2018, these bets served investors well. Even with the recent drawdowns, Amazon shares are up more than 50% so far this year, while Netflix has risen roughly 75% and Apple is up more than 30%. Of the FAANG group, only Facebook shares are down for the year.

“Crowded trades are popular for a reason. They’re good stocks. There’s just risk attached to them,” said Ms. Larson.

The risks have borne out in the past when other popular trades have unraveled. Bets against volatility fed the stock market’s tumble in February after the implosion of a number of exchange-traded products that had risen in value when gauges of volatility declined. Similarly, bitcoin investments tumbled at the beginning of the year on doubts about the practical utility of cryptocurrencies. And stocks with high dividends sold off following the 2016 presidential election as investors bet big on growth stocks.

This time around, some investors say such a pullback—so long as it’s not prolonged—is a good thing after tech’s seemingly unceasing climb higher for so many months.

“As much as it’s painful short term, it’s actually really healthy longer term that they’re pulling back,” said Mr. Slimmon, who added that after a reset in these momentum stocks, he could see these company shares rising again into the end of the year.

Write to Corrie Driebusch at corrie.driebusch@wsj.com



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