Nasdaq 100 Narrowly Avoids Correction as Technology Stocks Sink

(Bloomberg) -- The rout in technology shares sent the Nasdaq 100 Index toward a correction before a late-day bounce left the gauge off its lows of the day.

The index, heavily weighted toward the biggest tech companies, slid as much as 2.9% on Thursday before closing 1.7% lower, leaving it 9.7% below a Feb. 12 record. Tesla Inc., Peloton Interactive Inc. and Zoom Video Communications Inc. are among members that have lost at least 20% in that span. The Nasdaq 100 is now 3.3% lower for the year after rising as much as 7.1%.

The gauge is suffering as investors ditch companies that thrived in the work-from-home era in favor of last year's laggards, betting that vaccinations will end Covid lockdowns and fuel economic growth that aids cyclical stocks. The latest bout of selling came after a spike in yields raised concern that companies trading at high valuations may have trouble living up to expectations if borrowing costs surge.

“We've seen the overvalued megacap tech space assume the brunt of the weakness here,” said Candice Bangsund, portfolio manager of global asset allocation at Fiera Capital. “These sectors are having more trouble digesting the environment of higher bond yields.”

That was evident Thursday as Treasury yields climbed toward a one-year high after Federal Reserve Chairman Jerome Powell stopped short of pushing back on the recent increase in long-term borrowing costs. The 10-year rate added as much as 7 basis points to 1.55%.

While the Nasdaq 100 avoided a correction -- typically defined as a 10% drop from a peak -- the gauge is suffering as investors scale back bets on the market's speculative fringes. The mania in special purpose acquisition companies is showing signs of hitting a saturation point, with an index tracking them down about 20% from its peak. Cathie Wood's flagship exchange-traded fund, the Ark Innovation ETF, has gone negative for the year and is now 24% below its all-time high on Feb. 12.

The pullback isn't a surprise given the outlook for a more normal economy to return, and could represent a buying opportunity in a bull market that still has legs, according to Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“It may take some time for this to play out, but I don't believe the bull market will be derailed by this and ultimately any pullbacks are normal and can be bought,” he said.

Nonetheless, the rotation away from tech stocks seems to have taken hold and market leadership is likely to change, according to Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Co.

“It's kind of been the reverse of what we saw over the summer,” he said. “Some of the biggest tech companies are certainly under pressure and a lot of that has to do with the backup of long-term interest rates and what that means for longer duration equities.”

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