The US stock market showed signs of nervousness Thursday as three major indexes took a simultaneous dive, with little or no prompting from any noticeable bad news.
The Nasdaq composite index, in particular – a measure of the health of major US technology companies – fell hard, dropping 3% at some points during the day. The Dow Jones Industrial Average, a 30-company index of blue-chip corporate well-being, dropped 215 points to 16,221, and the S&P 500 dropped 34 points to 1,838 in midday trading. While the Dow and S&P dropped less than 2% each, the Nasdaq's precipitous fall was largely blamed for it.
The Nasdaq, which includes companies like Facebook, Apple and Google, has had a rough ride during most of 2014, hitting a peak of around 4,300 in February before dropping to Thursday's levels of closer to 4,070. The Nasdaq hit its peak on 5,408.62 on 10 March 2000, and has never come close to recovering, although the recent excitement around the tech industry in the US and companies like WhatsApp had led many to hope the good times would return.
The sudden dip fueled fears that the good times are over for the US stock market in general and the high-flying tech industry in particular, both of which enjoyed a ride to record or near-record peaks over the past five years. Many analysts attributed the can't-fail stock market to the largesse of the US Federal Reserve, which supported an aggressive stimulus of buying so many billions of dollars in bonds for government coffers that investors ran to buy stocks instead. That program has caused the central bank's balance sheet to swell with bonds to the tune of $4tn this year, from $1tn in 2007, before the financial crisis.
Since December, however, the Federal Reserve has pulled back on that stimulus, known as quantitative easing (QE). Markets have responded with predictable nervousness about what lies ahead when the government is no longer sending more buyers – and more money – into the stock market.
The result has been periodic queasiness and volatility in the stock market.
"The impact of easy money is always temporary and there is always a sobering up when it reverses," warned the Lindsey Group chief market analyst Peter Boockvar to investors on 25 March. "Bottom line: I believe it is no coincidence that all of a sudden biotech and other very expensive Nasdaq names are experiencing a sharp correction just as the [Fed] is one meeting away from basically cutting [quantitative easing] in half."
Boockvar suggested that the lack of the Fed as a safety net made investors less willing to gamble. "QE turns on all matter of speculative risk-taking and the reversal of it does the opposite," Boockvar concluded.
Barclays analysts reminded investors to "Recall [that] high-fliers were also hit in January, though not to this extreme," when the markets responded to the December news from the Federal Reserve.
Those Barclays analysts, Moyeen Islam and Joe Wynne, predicted this week that we are "approaching the ceiling for US equities," and suggested that it was an end to the days of soaring stocks led by Silicon Valley's technology and biotechnology sectors.
"Frothy parts of the equities have collapsed, including what we consider the 'disruptive trade'," they wrote on 8 April. "Biotech has been the hardest hit, and industries tied to the housing trade."
They predicted the bad news will continue: "For the broad market … we believe the second quarter will prove difficult for equities," they wrote.
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