Fall in big tech boosts Wall Street stocks

(Bloomberg) — Another tech leap, another shot in the arm for stocks rebounding in a terrible year on Wall Street.

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As the Federal Reserve stepped up its hawkish policy guidance this week on still-raging inflation, once-thriving Faang megacaps lost another $568 billion in market value, sending the cohort’s total capitalization to its lowest level since mid-2020.

With rising interest rates fueling the sudden end of Big Tech’s leadership, the biggest tech companies hold less and less sway over the broader indexes as former high-flyers such as Meta Platforms Inc. and Amazon.com Inc. crash again in the latest wave of selling. Reversing the extremes of years of cheap money, the cap-weighted S&P 500 hit its lowest relative to the equal-weighted version of the benchmark since 2019.

All of this is a boon for so-called factor investors, who analyze stocks according to their mathematically derived traits, from how cheap the stock looks to how quickly it has risen. These funds tend to underweight tech megacaps and tend to spread their exposures, a favorable setup in this era of enhanced market coverage.

In 11 of the past 13 sessions in which the S&P 500 has declined more than 2%, strategies favored by factor funds such as value, quality, momentum and low volatility have all made money, according to the market-neutral Dow Jones Indices.

“You have a much more diverse set of options, which allows more factors to come into play,” said Sean Fire, head of quantitative investing at Abrdn Investment Management. “Before that, 2019, 2020 was a very one-dimensional market.”

Systematic managers who implement factor strategies in one form or another are on a winning streak. The AQR Equity Market Neutral fund has rallied again since October to post a 21% gain so far this year. The Jupiter Merian Global Equity Absolute Return Fund, which bled assets during the tech boom, rose nearly 7%.

Wall Street’s math whiz crunches data to find patterns throughout the stock market. This means that they mostly spread their bets across a huge number of securities. So when market gains are concentrated in a few megacaps, quants will almost by definition own far fewer of those stocks than a cheap and cheerful S&P 500 tracker. That was the case in the low-interest-rate years when the Faang block — Facebook Inc., now known as Meta, Apple Inc., Amazon, Netflix Inc. and Alphabet Inc., parent of Google, is driving the bull market.

Now a wider pool of winners gives money managers more options. Reversing trends ahead of 2021, the S&P 500 jumped about -8% in October, even as half of the Faangs fell.

Recently, the momentum factor, a popular quantitative trade, has also joined the party. A chameleon style of investing that simply bets on last year’s winners doesn’t do well at turning points like early 2022. But after rebalancing into better performers like health and energy stocks, the strategy has improved through quarter in a sign of persistent trends led by sticky inflation.

The $12 billion iShares MSCI USA Momentum Factor ETF (ticker MTUM ) drew a record $2 billion in inflows last month after its 13% jump beat the broader market by the most in its nine-year history. A market-neutral version compiled by Bloomberg is on track for its best year since 2015.

“Momentum is the all-weather strategy,” Christopher Harvey, head of equity strategy at Wells Fargo, wrote in a note. He expects more market damage from inflation and jobs data, touting momentum strategies because they “tend to do well” in stressful conditions.

Meanwhile, 87 percent of high-momentum firms have beaten earnings expectations this season, compared with 70 percent of the S&P 500, according to Harvey. These winning names are also rewarded more for good results and penalized less for bad ones.

The value strategy of buying cheap stocks has also taken another hit with rising interest rates driving investors away from high-yield stocks. Meanwhile, low-volatility trading shines as steadier stocks like healthcare companies gain.

These trends have only intensified recently with US heavyweights such as Amazon, Alphabet and Microsoft posting disappointing earnings – a major reversal from the unbridled tech optimism of the low-interest-rate era.

“The one dimension that’s pushing these names into excess return — that model is somewhat broken,” said Abrdn’s Phayre. “In 2021, 2022, the realization is that there will be some form of payback for all the cheap money.”

–With the help of Lu Wang.

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