Why megacap stocks rallied after Russia invaded Ukraine
As Russia launches a war against Ukraine, the Nasdaq Composite (^IXIC) — down more than 3% at Thursday's open — mounted a furious comeback, with megacap stocks Microsoft (MSFT) and Alphabet (GOOGL, GOOG) doing much of the heavy lifting.
However, the eight largest U.S. publicly traded companies have hemorrhaged over $2 trillion in market capitalization since their combined value peaked in mid-November. According to one Wall Street strategist, the geopolitical maelstrom may give bottom-fishing investors the opportunity to start nibbling at beaten-down stocks.
The combined market cap of Apple (AAPL), Amazon (AMZN), Alphabet, Microsoft, Meta Platforms (FB), Nvidia (NVDA), and Berkshire Hathaway (BRK-A, BRK-B) surged 168% from the pandemic low — from $4.3 trillion to a peak of $11.7 trillion on Nov. 19. Shortly thereafter, Apple would briefly top $3 trillion in value — but tantalizingly, it was never able to settle over that milestone valuation.
Rocky start to 2022
As inflation picked up sharply in the fourth quarter, U.S. Treasury yields across the curve (^FVX, ^TNX, ^TYX) surged higher. However, the shorter maturities gained more quickly than the long end — flattening the yield curve. In early January, investors woke up to the most hawkish Federal Reserve in 40 years, along with economic data rolling in on the toll the Omicron variant was taking on spending and the labor market, as vast swaths of workers called in sick for weeks.
This set the stage for the messy year investors have faced so far — with pricey growth companies and financial stocks flagging as the yield curve flattens. In the S&P 500 (^GSPC), only the energy sector has advanced this year — up over 20%. That's as WTI crude oil (CL=F) finally hit north of $100/bbl — for the first time since mid-2014.
This year alone, the average megacap stock is returning a loss of 17.6%, with Meta leading the way down — off 41.0% — thanks to a major earnings disappointment. But even Alphabet, which popped 7.5% after a big earnings beat, is down 12% this year. Tesla and Nvidia are each off by more than 20%.
Yet despite the carnage, investors are on the lookout for signs of selling capitulation to mark a potential bottom.
DailyFX.com Senior Strategist Christopher Vecchio joined Yahoo Finance Live early Thursday as the Nasdaq opened down nearly 3.5%. To help find signs of a bottom, Vecchio said investors should look to see elevated fear levels in the market as expressed by the CBOE Volatility Index (^VIX) and the CBOE VVIX Index (^VVIX).
"During other market sell-off episodes, two things have popped out that suggest we're nearing an exhaustion point. That would be [the] VIX above 35, and VVIX — the volatility of the volatility index — moving above 150. We didn't see that yesterday. It's likely that we're going to see that today," said Vecchio.
By midday Thursday, the VIX had peaked at nearly 38, and the VVIX had topped out at 145.
Vecchio is also looking at some of the broader index levels falling into territory not seen since last year — giving some confidence to dip a toe in the investing waters again on a short-term basis.
"Both the Nasdaq and the S&P 500 are coming into some technically significant levels — really going back to the May 2021 lows. And I do think that at that point in time, given the specter of this sell-off, it becomes sensible from a risk-reward standpoint — at least try to cherry pick a short-term bottom," he said.
EvercoreISI tech analyst Mark Mahaney shared a similar sentiment on Yahoo Finance Live Thursday, arguing that it makes sense to buy quality names at these levels — like Amazon and Google — if one's investment time frame is longer. "If you have a 9 to 12 month outlook, you will be able to start off buying the highest quality names," said Mahaney.
Vecchio stresses that Russia is only a catalyst against the backdrop of several larger market themes. "This all ties back to what's happening with the Fed in March. Russia is an accelerant here, but the conditions are in place for weaker stocks. You have a decline in corporate earnings, a weaker growth environment and of course record high inflation."
Analysts have been quick to point out that the Fed is less likely to front-load the monetary tightening process against the new geopolitical backdrop. Vecchio believes the Fed will hike its benchmark rate in March by only 25 basis points instead of 50 bps — regardless of the final inflation numbers that are released before the meeting.
"[U]ltimately given the scale of the decline we've seen thus far — looking into those May 2021 lows — it is a stopping point for further bleeding," said Vecchio, referring to the price action in the S&P 500 and Nasdaq early Thursday.
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Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.
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