As stocks fall, options traders show no rush to guard against deeper pullback
Technology stocks stabilised on Tuesday despite sharp declines more broadly across Wall Street, as investors weighed whether resurgent inflation could prompt central bankers to rethink current loose monetary policy.
The blue-chip S&P 500 index closed lower by 0.9 per cent. The Nasdaq Composite — whose largest constitute includes big tech groups Apple, Amazon, Facebook and Tesla — initially dropped 2 per cent before paring back most of those losses to end down 0.1 per cent as “buy the dip” investors re-emerged.
Asset manager Cathie Wood dismissed the prospect of a deeper bear market in technology shares at a monthly webinar with investors held on Tuesday. She said funds run by her firm, Ark Investment, which has become a bellwether for speculative tech stocks, had endured many big drops over the past five years.
“Our long-term performance is determined by what we do in downturns,” she said. “We average down and it has been a successful strategy.”
Since its February peak, the value of Wood’s flagship Ark Innovation fund has tumbled by about a third, as the value of its shares in companies such as Tesla have fallen sharply. The prospect of higher interest rates, should inflation be sustained, threatens to undermine the valuations of fast-growing tech companies in particular, since more of their forecast profits lie further in the future.
On Tuesday, Wood predicted that the recent surge in many commodities prices, which has jangled investors’ nerves for its impact on inflation, would give way to a “very serious correction”.
Fed officials, meanwhile, have reassured investors that they would pursue a “patient” approach to adjusting their monetary policy in the face of higher inflation and job gains, a message echoed by Fed governor Lael Brainard on Tuesday, who said a “transitory surge” in inflation would abate when imbalances in the supply chain and labour market resolve themselves.
Data to be published on Wednesday are expected to show headline consumer prices in the US rose 3.6 per cent in April from the same month last year.
“Inflation is creating a lot of fear among investors because of the possibility that the central banks are not ready to deal with it,” said Aneeka Gupta, research director at WisdomTree.
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The spectre of cost pressures was raised on Tuesday by data showing Chinese factory gate prices, an indicator of what domestic consumers and western importers will pay for goods, rose 6.8 per cent last month from the year before, the fastest pace in three years.
Meanwhile, mentions of “inflation” among executives in Wall Street corporate earnings conference calls are near the record high struck a decade ago, with many companies saying they plan to pass on higher costs to consumers, according to Bank of America.