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Tech Goes From Haven to Hazard as Investors Fear Recession

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(Bloomberg) -- Selling is picking up again in the priciest corner of the U.S. stock market -- that of fast growth technology shares -- as investors whipsaw between seeking higher returns and safety.

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The Nasdaq 100 Stock Index is wrapping up its worst two-day drop in nearly a month as traders that flocked to the tech sector in recent weeks have started to ditch the shares on Tuesday in favor of utilities and consumer staples. Losses mounted on Wednesday, with the 4% decline in the benchmark ensnaring nearly every stock with high valuations, led by Microsoft Corp. and Nvidia Corp. Meanwhile, defensive plays including Southern Co. and Dollar General Corp. rose.

Concerns about the risks of over-aggressive Federal Reserve tightening were revived by comments from Federal Reserve Governor Lael Brainard on Tuesday suggesting the central bank will rapidly reduce its bond holdings. Combined with high inflation, soaring energy prices and the war in Ukraine, investors are once again seeing a greater risk that the economy tips into recession.

“A recession doesn’t look imminent, but the recipe is there,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group. “There are lots of reasons to be concerned and to think that maybe the rally we saw over the last two weeks wasn’t the start of a new market regime and instead more of an oversold bounce.”

Minutes of the last Fed meeting released on Wednesday did little to assuage jitters even after FOMC members proposed shrinking the central bank’s bond holdings at a maximum pace of $95 billion.

“Investors have finally come to the realization that the Fed is going to be aggressive even if it causes some pain in the markets,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Their No. 1 priority right now is inflation.”

Minutes Show Fed Willing to ‘Walk the Walk’: Wall Street Reacts

The selling hasn’t been limited to high-multiple growth stocks. Sectors that are more cyclically sensitive like banks, for example, have also been pummeled. The KBW Bank Index is close to sinking to a new low for the year after dropping 9% in 2022.

The rising pessimism was evident in the trading of the biggest technology stocks. Apple and Microsoft, whose strong balance sheet, huge cash flows and broad portfolio of businesses, have made their stocks popular havens in times of uncertainty, have dropped in the past two days. Microsoft has fallen more than 5%, while Apple is down 3.5%.

“We’re re-embracing these old concerns that growth is going to slow down and we can’t sustain these multiples,” said Daniel Morgan, senior portfolio manager at Synovus Trust. “There’s enough worry that people are going to take profits ahead of the upcoming tech earnings season.”

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