Volatility will stay high: investors have had enough of tech giants

Investors hunted down tech heavyweights like Amazon and Google for a long time. For many, the price slump yesterday came practically out of nowhere – but the correction was long overdue in view of the sustained soaring.

The US tech sector's slump in prices apparently out of nowhere was a reality check for investors. After the Nasdaq nearly doubled from its March lows, it was just a matter of "when" the long overdue correction would occur. Volatility on the stock exchanges is likely to remain high in the coming weeks as the US presidential elections are increasingly becoming a market topic.

The correction in US technology stocks is important beyond the sector, as the rally on the US stock exchanges was recently mainly driven by FAANG stocks, i.e. Amazon & Co. This has driven the ratings to extremely sporty heights: According to Commerzbank, the price-to-book ratio for the Nasdaq-100 is 8.1, well above the long-term average of 4.1. The P / B for the S&P 500 is now 3.8, compared to a ten-year average of 2.6. Options markets are pricing in increases in volatility. It is not surprising that the stock exchanges would sooner or later let the air out in the face of such high-altitude flights.

Options markets have long priced in higher volatility. High market fluctuations are also expected around the time of the US presidential elections. This is not surprising, as US President Donald Trump reminds almost every day that he can only lose through electoral fraud – a possible constitutional crisis is looming.

The main reason why the price-earnings ratio in the S&P 500 is now 40 percent above the historical average despite the corona pandemic is the flood of liquidity from the central banks. There is no end in sight. The US Federal Reserve recently dropped its inflation target of 2 percent and replaced it with a flexible one. Specifically, this means that the Fed will tolerate inflation rates of more than 2 percent in the future in order to compensate for phases of low price increases.

The ECB does not like the strength of the euro at all

This is good news per se for risk assets, as investors no longer have to assume that the Fed will take monetary policy countermeasures when inflation rises. The swing of the US Federal Reserve is initially of little practical importance, as zero interest rates were priced into the markets for years before the change in strategy. On a whole other sheet of paper is whether the Fed will even succeed in generating higher inflation rates – Japan sends its regards. The turnaround in monetary policy by the US Federal Reserve should not leave the ECB unaffected. However, the results of the strategy review are not expected until next year.

At the monetary policy meeting next Thursday, investors should learn little new. Measures are not expected. However, possible comments about the strength of the euro in recent months could move the market. The strength bothers the ECB, as it is putting pressure on the already low inflation in the euro area.

Meanwhile, the fundamental environment also has some positive things to offer. Economic data suggest a sustained recovery. This should also be shown by the data on industrial production from Germany, France and Italy in the coming week. More importantly, it is now firmly assumed that one or possibly several Covid 19 vaccines will be available by the end of the year. That gives hope for a normalization of life in 2021.

A period of heightened volatility doesn't have to be bad news for investors. After all, it enables entry into the market at lower prices. The correction of the FAANG shares is ultimately in the interests of investors. Because no stockbroker believes that it is more than a correction. The monetary pressure of the central banks and a sea of ​​negative market interest rates ensure that there will be no avoiding stocks in the future.