Chip Rout Worsens as Tax Rotation Sends Stocks to Five-Week Low
(Bloomberg) -- A frantic rotation in the equity market once again sent chipmakers reeling, handing bulls their fifth drop in six days as investors reallocated into stocks seen as more likely to benefit from a tax cut.
Losses were steepest in Nvidia Corp., the processor maker that was up 100 percent for the year as recently as Nov. 24, and Advanced Micro Devices Inc., one of last year’s best-performing technology companies. Semiconductor stocks have suffered amid a broader selloff in the technology industry, which at times in 2017 has been up twice as much as any other group.
“It’s a continuation. The immediate beneficiaries of the tax plan are financial stocks and industrials more so than technology and that’s part of the logic behind that rotation,” said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago. “We’re still a little ways away from actual passage, but it’s starting to look like something will get done.”
Nvidia slid 5.6 percent at the close Monday, bringing its loss over the last six sessions to 14 percent. Advanced Micro Devices Inc. fell 6.5 percent to a 10-month low, Micron Technology Inc. slid 5 percent, On Semiconductor Corp. declined 4.4 percent and Applied Materials Inc. dropped 4.1 percent.
Warnings have poured in from Wall Street brokerages over the last few days urging investors to lighten up on companies that have led the rally in 2017, specifically growth and momentum names that show up in hedge fund portfolios. JPMorgan Chase & Co. equity derivatives strategist Shawn Quigg wrote in a note that companies from Micron to Applied Materials may suffer as tax reform puts the focus on other industries.
Along with the celebrated FANG group of Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., chip stocks have helped propel quantitative strategies that pile into the biggest winners. The MSCI USA Momentum index is up 35 percent in 2017, an advance that would mark its biggest annual rally since the dot-com era.
Another potential issue for technology stock sentiment right now is that they don’t pay that much to the federal government. Among sectors, the 18.5 percent effective tax rate enjoyed by the group is the third-lowest among U.S. large caps, according to S&P Global data. And that means less potential bounty should Republican legislation moves through Congress.
“The tax reforms clearly has kicked off a massive unwind of what was the popular trade,” said Aaron Clark, a fund manager at Boston-based GW&K Investment Management, which manages $36 billion in assets. “The rubber band has stretched pretty far in one direction, it was bound to unwind itself a little bit. From a purely tax standpoint tech stocks are to benefit the least from a tax reform. I wouldn’t be surprised if a lot of this rotation is driven by quant models, which tend to be momentum following, so it’s a little bit self-reinforcing.”
Chipmakers, whose 43 percent surge before last Monday made them the best-performing group in the S&P 500, were summarily ousted from that throne last week as steady selling sent them down more than 5 percent on the week. A gauge of companies in S&P indexes that sell equipment for semiconductor production fell the most since 2009.
Last week’s volatility and losses “were signs of what can happen when trends change and heavy positioning comes undone,” Michael Wilson, Morgan Stanley chief U.S. equity strategist, said in a note on Monday. “We do not think there is something more sinister afoot quite yet, but think the positive tax reform news forced a larger move toward cyclicals and relative tax beneficiaries that was funded by what seems like the universally preferred sector in the market -- tech.”
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