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Why Facebook Got Swept Up in the Market Sell-Off Today

By Jeremy Bowman – Jun 11, 2020 at 5:07PM

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Despite its strengths, the business is still sensitive to broader macroeconomic factors.

What happened

Shares of Facebook (META -0.54%) were getting pummeled along with the broader market today as the social media giant closed down 5.2%. By comparison, the S&P 500 index lost 5.9%.

So what

Facebook's slide came as investors fled stocks after negative commentary from Federal Reserve Chairman Jerome Powell yesterday, and on fears that a second wave of infections could hamper the economic recovery as a number of states, including California, Texas, Florida, and Arizona, have seen new daily COVID-19 cases increase over the last week.

The Facebook "Like" sign at the entrance to its campus

Image source: Facebook.

As a business almost wholly dependent on advertising spending, Facebook's performance is highly correlated with the strength of the broader economy both domestically and globally. The company said ad revenue fell in March when the pandemic and shutdowns first hit the U.S.,  but sales had recovered to flat year-over-year growth in April.  

Because Facebook relies on small businesses to advertise on its site, any further impact to the economy from COVID-19 or fears of the virus that would cause consumers to stay at home would be bad for Facebook's business.

Today, the company also feuded with the Joe Biden campaign, which is calling on its supporters to ask Facebook to be more vigilant about misinformation on its platform, especially in light of President Trump's attacks on mail-in voting and other posts that some believe are undermining democracy. Facebook responded by saying it is respecting the rules made by elected officials and that President Trump had issued an executive order two weeks ago forbidding social media companies from doing things like fact-checking political posts. In the statement, Facebook concluded, "There is an election coming in November and we will protect political speech, even when we strongly disagree with it."  

The dust-up was a reminder that Facebook and CEO Mark Zuckerberg continue to court controversy for Facebook's refusal to take down or modify false and misleading statements on its platform.

Now what

The dispute with the Biden campaign and Facebook's own stance on political ads is likely to attract more attention as the election heats up. Meanwhile, Facebook, like the rest of the market, may have been overdue for a pullback given the economy is still on shaky ground and stocks had essential recovered all of their pandemic-related losses despite plenty of risks, including a second wave of infections.

While Facebook could fall further if the market continues to pull back, its long-term prospects still look strong given its sizable economic moat.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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