Tech Rout Triggers Shift to Defense Mode for Portfolios
The stock market's relentless rally is facing increasing headwinds, prompting investors to take defensive action across their portfolios. Thursday's selloff, which saw the Nasdaq slump 0.7% and the Dow shed over 500 points, underscored the growing risks on the horizon.
The culprits were familiar - escalating U.S.-China tensions over trade and technology, economic uncertainty around the Fed's interest rate path, and the wildcard of a contentious presidential election cycle. But instead of buying the dip, many investors pivoted to protect recent gains.
"We're seeing a pretty broad de-risking happening right now across client portfolios," said Max Godin, managing director at Summit Trail Advisors. "The market has had such an incredible run, but the political and geopolitical landscapes are looking very unsettled. It's better to be defensive until we get more clarity."
The first move has been a rotation out of the high-flying tech and growth stocks that have led the market higher. Giants like Nvidia, TSMC, and ASML got hammered again amid fears of tighter U.S. export curbs to China targeting the semiconductor industry. Even TSMC's strong earnings provided just a temporary rally before nervous investors took profits.
Rather than doubling down on the previous leadership, many funds have been trimming exposure to the more speculative areas of tech and shifting toward more defensive, value-oriented sectors that tend to hold up better in volatile markets. Thursday's 2% plunge in the Russell 2000 small-cap index signaled reduced appetite for risk among some portfolios.
At the same time, investors have been actively raising cash positions and looking for opportunities to add downside portfolio hedges like put options. Economic data like rising jobless claims has fanned hopes for a Fed rate cut, but also stoked fears that a recession could be looming.
"We've seen clients put on some protective puts in case we get a bigger sell-off," said Michael Jones, chief investment officer at Southridge Capital. "There's a lot of potential catalysts that could spark volatility, from updating Fed projections and China relations to Biden's health situation impacting the election."
Indeed, President Biden's COVID-19 diagnosis has revived chatter about potential replacements, adding another layer of uncertainty for markets already on edge about a tight election against Donald Trump.
For investors who just endured the historic crash of 2022, the instinct to take some chips off the table is understandable. While the nascent rally could simply be taking a pause, few want to be caught offsides if a bigger storm is brewing on the horizon.
"The playbook has simply shifted to playing better defense right now," said Jones. "Get some protection in place, remove some of the frothy tech names that have had huge runs, raise a bit more cash, and look for sectors that can better weather any volatility ahead."
With economic conditions looking more unsteady and geopolitical tensions rising, portfolio positioning is prioritizing capital preservation mode for the time being. The rally will likely have to overcome some turbulence before investors regain full confidence to reload on risk.