What happened
Many tech stocks got a haircut on Tuesday as Wall Street turned away from seemingly risky investments in favor of more sensible value plays. Any ticker with a recent history of market-beating returns was fair game for a sharp correction, including many popular investments in the technology sector.
As of 2:35 p.m, EDT, database specialist MongoDB (MDB 0.62%) had fallen as much as 4.8%. E-commerce technologist Shopify (SHOP 1.61%) dipped 5.9% lower at most. Data-warehousing expert Snowflake (SNOW 0.21%) bounced back from a 5.5% nadir, and media-streaming veteran Roku (ROKU 1.25%) found support after a 4.5% fall. Even mighty Apple (AAPL 0.86%) suffered a maximum drop of 2.5%.
Together, the lowest points for this group of five stocks added up to $80.6 billion of lost market value today. The funny thing is, none of these fantastic companies did anything wrong. They were punished as a group for the debatable offense of delivering strong returns to shareholders in recent months.
Image source: Getty Images.
So what
The specific details may differ, but the themes are all the same. Here's what these stocks looked like on Monday evening:
- MongoDB had gained 133% over the previous 52 weeks, trading at 42 times trailing sales with negative earnings.
- Roku looked back at a one-year gain of 88%. The stock traded at 196 times trailing earnings and 19 times sales.
- Shopify had amassed a 54% return over the same period. Shares were changing hands at 392 times earnings and 47 times sales.
- Snowflake's annual gain stopped at 48%. Like MongoDB, this company is not reporting positive bottom-line earnings. The stock was soaring at 95 times trailing sales.
- Apple's full-year returns were actually slightly below the S&P 500's 35% gain, but the iPhone maker had tripled the broader market's 5% returns since early June. At 28.5 times earnings and 7 times sales, Apple's shares straddled the line between growth stocks and value investments.
These combinations of recent gains and soaring valuation ratios set our example tickers up for painful corrections today. To be clear, none of the companies listed above had any significant news of their own today.
Now what
The driving force behind Tuesday's flight from riskier stocks was a surging bond market, where the yield on 10-year Treasury notes rose to a three-month high of 1.53%. The stock market can be sensitive to large moves in these ultra-safe investment returns. Higher bond yields give value investors a more sensible safe haven in times of turmoil.
In turn, the rising bond rates followed from the idea that the Federal Reserve looks ready to stop plowing billions of dollars into the bond market someday soon. The rising yields are still lower than the long-term annual inflation target of 2%, which limits the power of the bond market as a whole. Tuesday's anti-risk corrections will look tame by comparison if that yield-to-inflation relationship flips around, which might actually happen when the Fed's quantitative easing program finally runs its course.
I'm not saying it's time to sell every high-risk stock and reinvest the cash in bonds and gold, but investors should be ready for a more dramatic drop in the relatively near future. If anything, I might increase my investments in MongoDB and Roku if their stock prices tumble for purely economy-based reasons.
After all, these great companies are poised for long-term success in their chosen sectors regardless of bond yields and inflation rates. In the long run, stock prices are based on business results, not on the availability or lack of investment alternatives.
