The Nasdaq Composite (NASDAQINDEX:^IXIC) index has been leading the stock markets higher through 2020, having set new records on several occasions. On Monday, however, there was definitely a much different vibe. A midday drop came for the broader market, and many commentators blamed it on Washington’s continued inability to reach a compromise on additional economic stimulus for the U.S. economy. By 3:15 p.m. EDT, the sell-off had accelerated, and the Nasdaq was down almost 1.5%.
Pullbacks for the Nasdaq index haven’t been uncommon over the course of the year, as investors have generally been ready to flinch at the first sign of bad news. However, there was something about the way the market behaved on Monday that was particularly unusual. To get a sense of it, you need to look at the largest and most important companies listed on the Nasdaq Stock Market and see what they have in common.
Falling in concert
If you looked at the stocks that make up the most influential companies in the Nasdaq-100 Index in the closing hour of trading, you might have noticed just how uniform their performances were. Consider:
- Among the top five companies, Apple, Microsoft, Amazon, Facebook, and Alphabet were all off between 1.9% and 2.4%. The narrow range of variation among the group was unusual.
- Looking further down the list, the top 10 stocks all showed similar patterns. Tesla was down just 1.5%; Adobe and PayPal Holdings were similarly down less dramatically than the top five, but it was uncanny how closely related their drops were.
Only once you got out of the top 10 did some different performances start showing up. Netflix (NASDAQ:NFLX) was slightly up in the late afternoon, as investors tried to anticipate how the video-streaming company would do when it releases its latest earnings results on Tuesday. Intel (NASDAQ:INTC) gained ground on news that it might be close to a strategic divestiture of one of its business units, with the intent of narrowing its focus and putting itself in a better position to compete against its biggest rivals.
Are index investors to blame?
It’s easy at first glance to blame index investors for the lockstep movements of top stocks on the Nasdaq. After all, billions of dollars in ETF shares tied to the Nasdaq-100 index trade every day. When ordinary investors are concerned about the market, it’s a lot easier just to sell shares of an index fund than to pick and choose from among individual stocks. Many investors choose never even to own individual stocks.
Yet index investors don’t deserve all the blame. It’s also gotten far easier for retail investors to trade shares of individual companies on the index, and because those companies are among the best-known and most popular, it stands to reason that they’d be among the most likely to see trading activity rise when people are concerned.
Broad-based macroeconomic and political issues like those the market is seeing today also lend themselves to widespread declines. Some factors only affect particular companies, but others have a broader scope, with an impact on just about every company in the economy.
Nevertheless, when individual stock returns are this aligned with each other, it’s unusual and looks strange. If such close alignment starts to be the rule rather than the exception, then investors would be well-advised to take notice.
