Stocks Endure Second Straight Day Of Sell-Off, Despite Strong August Jobs Report

Despite a generally favorable August jobs report, stocks suffered a second straight day of sell-offs.

As of 2:30 p.m. ET, the Dow Jones Industrial Average was down 215.61 points, or 0.76%; the S&P 500 sank 40.2 points, or 1.16%, while the tech-heavy Nasdaq dropped 226 points, or 1.97%.

Market heavyweights Facebook (FB) and Amazon (AMZN) were each down more than 3%.

Earlier in the day, the Dow was down by more than 600 points.

“We’ve had excessive valuations in the markets lately, particularly in the tech sector, and that needed to be corrected to some degree,” said Scott Knapp, chief market strategist at CUNA Mutual Group, according to CNBC. “One needs to look no further than the recent irrational run-up in Tesla (TSLA) and Apple (AAPL) share prices after both companies announced a stock split to see overexuberance, especially among retail investors.”

″ We view the latest sell-off as a bout of profit-taking after a strong run,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Stocks are still well-supported by a combination of Fed liquidity, attractive equity risk premiums, and an ongoing recovery as economies reopen from the lockdowns.”

Greg McBride, chief financial analyst at Bankrate, told International Business Times: “The S&P 500 had rallied 63% from the March lows, with even larger gains in many technology stocks. Whether this is a brief pause or the beginning of a correction is not something we know at this point, but what we do know is that some volatility and some profit-taking is normal, especially after such a heady advance.”

David I. Kass, clinical professor of finance at the University of Maryland, told IBT the sharp selloff in the large tech stocks and the overall market over the past two days reflects both profit-taking and concerns over the high valuations of these market leaders resulting from the accelerated pace of their share price increases over the past two weeks.

“This market decline should be brief in duration as the economic background of very low interest rates and gradual recovery, along with the expected approval of a [COVID-19] vaccine in the near future, should provide the underpinnings for a favorable investment climate,” he added.

The recent wild run-up in tech stocks has been partly traced to Japanese conglomerate SoftBank which purchased nearly $4 billion of shares in tech companies including Amazon, Microsoft (MSFT) and Netflix (NFLX) in the spring. SoftBank also recently spent about $4 billion on call options linked to its stock holdings. the Wall Street Journal reported.

The Financial Times also reported that SoftBank was also purchasing equity derivatives on a huge scale.

These options purchases apparently created a trading frenzy, pushing up prices and volumes.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, criticized SoftBank’s apparent actions.

“It’s just a trip to the casino,” he said, according to CNBC. “If they’re supposed to be an investment company taking a long-term horizon, then trying to juice your short-term return through options, you’ve turned into a hedge fund.”

Boockvar also wondered if SoftBank is trying to unload its positions now.

“We’ll see if they’re reversing it,” he said. “A lot of the call buying was an upward lift to the market. The sellers of those calls, then had to buy stocks and hedge and it becomes a self-fulfilling prophecy on the upside.”

Steve H. Hanke, professor of applied economics at Johns Hopkins University, who also served on President Reagan’s Council of Economic Advisers, told IBT: “We have seen a continuation of the market sell-off as money shifts out of equities that have surged during the fear-phase of the COVID-19 pandemic. The market is taking profits from tech and rotating into cash while waiting to pile into undervalued segments of the market that would benefit from a recovery. But, the rotation will take time, so further sell-offs are likely before the market settles on a new winning combination.”

"We always say you can’t predict the market, and this year has illustrated that -- no one would’ve expected such a fast recovery or stock market highs during a pandemic,” Arielle Shea, an expert on retirement and investing at NerdWallet, told IBT. “As always, perspective is important. The stock market goes up and down, but those dips and periods of volatility don’t always signal that a correction or something worse is pending -- and for long-term investors, they rarely matter at all. As long as your goals, time horizon and risk tolerance haven’t changed, your investment decisions shouldn’t change, either."