Tech stocks fell victim to their own success on Tuesday, as some of the best performing equities of the year yielded to the showdown in Washington.
Market resilience to the congressional impasse weakened with the partial government shutdown in its second week and the debt ceiling deadline approaching. Amid a broad market selloff, investor anxiety concentrated on the technology sector, interrupting the astronomical gains that some of the biggest equities in tech have posted this year.
"It's been a terrific, unbelievable ride on the U.S. market," said Barry Schwartz, vice-president of Baskin Financial Services Inc. "But a number of those stocks are overvalued, overhyped, played out. And the momentum can shift dramatically."
The day saw stock benchmarks in Canada and the United States fall by 0.8 per cent and 1.2 per cent respectively. Losses were magnified for companies such as Facebook Inc., LinkedIn Corp. and Netflix Inc., which all fell by 5 to 7 per cent.
Meanwhile, a number of tech value stocks, such as Microsoft Corp., Cisco Systems Inc. and Hewlett-Packard Co., held up relatively well, more or less matching market losses, said Brian Pinchuk, portfolio manager at Lorne Steinberg Wealth Management Inc. The biggest losers were mostly "Internet story stocks … where the fundamentals are less certain and the stocks have had significant rallies." Prior to this week, both LinkedIn and Facebook had roughly doubled in market value so far this year, while Netflix had more than tripled.
"They're terrific companies, but you're paying stupid valuations for them," Mr. Schwartz said. "The tide will turn for those names at some point." With valuations elevated by momentum and future earnings speculation, those stocks are vulnerable to a shift in sentiment, he said.
That shift came courtesy of U.S. legislators, who failed to come to the fiscal agreement needed to avoid a government shutdown. Investors accustomed to U.S. political posturing are now beginning to worry about the negotiations to increase the federal borrowing limit before the debt ceiling is hit on Oct. 17.
Most observers peg the risk of a U.S. default in the range of zero to highly remote. Regardless, consequences as dire as those arising from a technical default merit investor consideration, David Rosenberg, chief economist at Gluskin Sheff + Associates, said in a report. "Selling pressure on the U.S. stock market is gaining some steam."
"At least investors can begin to prepare for the even remote odds of such an event taking place," Mr. Rosenberg said.
In that kind of environment, portfolio managers might be tempted to take some profits and reduce some exposure, said Alex Ruus, portfolio manager at BluMont Capital Corp. Selling certain tech stocks – those with lofty multiples and great uncertainty – accomplishes both, he said. "This is dragging on longer than expected so people are taking some risk off the table."
Also among the equities targeted in the day's selloff were TripAdvisor Inc., which was down 5.5 per cent, and Yahoo Inc., which fell by 3.5 per cent.
The day's reality check for tech's most ascendant stocks could prove be an early indication of a sustained correction, which would diminish the gains made by investors over a remarkable stretch for U.S. equities, Mr. Schwartz said.
"Sometimes markets just go down," he said. "We're just due."