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Business Day|Fast-Growing Sectors Drive a Market Sell-Off
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Traders on the floor of the New York Stock Exchange on Thursday, a day of sell-offs in biotechnology and fast-growing sectors. Credit Andrew Gombert/European Pressphoto Agency
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Investors dumped Internet, biotechnology and other fast-growing companies at a dizzying pace on Thursday, dragging down the rest of the stock market and stirring up painful memories of the dot-com bust in 2000.
The worry is that a driver of economic growth — stock market wealth and the creation of new companies — may be losing steam.
“Markets are always vulnerable when almost everyone thinks nothing can go wrong,†said Byron Wien, the vice chairman of Blackstone Advisory Partners. “And when the mood changes, even good news doesn’t go very far.â€
The sell-off was sharpest in high-flying technology stocks; the Nasdaq composite index plunged 129.79 points, or 3.1 percent, to 4,054.11, on Thursday. That was its biggest drop since 2011. But the tumult spread through many industries as the Dow Jones industrial average slumped 1.62 percent, or 266.96 points, to 16,170.22, and the Standard & Poor’s 500-stock index fell 2.09 percent, or 39.10 points, to 1,833.08.
The slide continued in Tokyo on Friday morning, where the Nikkei fell 2.3 percent.
The anxiety threatens to put a chill over the market for initial public offerings. The pipeline has been robust in recent months, as technology start-ups and other young companies rush to tap the equity markets and investors line up for their shares.
But many newly public companies have been struggling since their debuts in recent weeks. One of the most anticipated I.P.O.s, King Digital Entertainment, the maker of the popular Candy Crush Saga app, has been under significant pressure. The stock is off 19 percent from its offering price.
Zulily, the clothing site focused on mothers and children, went public in November, taking advantage of the strong market. On Thursday, its stock was down 7 percent.
Ally Financial, the bailed-out auto lender, priced its offering at $25 a share, the low end of the expected range. In its market debut on Thursday, shares were down almost 4 percent.
“We’re starting to see some pushback from investors on pricing, especially recently,†said Kathleen Smith, a principal at Renaissance Capital, an I.P.O. research firm. “If investors have been getting shares in the I.P.O., but getting no performance afterward, they’re going to look for discounts.â€
The question is whether the sell-off will be short-lived or translate into a broad-based weakness. The Nasdaq, which was up 38 percent in 2013, is down almost 3 percent since the start of the year.
“Market leaders have lost momentum,†Bruce Bittles, chief investment strategist at Baird Market and Investment Strategy, said in a note. “The investment backdrop in 2014 is much different than 2013.â€
Investors’ exuberance, in part, has waned over fears that the Federal Reserve might pull back its stimulus faster than expected, pushing interest rates higher. In the bond market, interest rates declined.
Investors are also looking ahead to corporate earnings, which have just started to trickle out. Bed Bath & Beyond shares fell 6.17 percent after the home goods retailer reported lackluster fourth-quarter and full-year earnings.
The great economic engine in China, too, has been showing signs of weakness. Trade figures from China overnight showed an unexpected slowdown, though the data was too mixed to suggest an imminent hard landing.
The slumping stocks came even on a day of positive economic data in the United States. Jobless claims dropped sharply, hitting the lowest level since before the Great Recession.
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“Investors had unreasonably optimistic scenarios for high-growth names. Now that’s all coming back down to earth,†said Michael Yoshikami, chief executive of Destination Wealth Management, based in Walnut Creek, Calif. “Investors do not have faith that this earnings season is going to deliver the blowout numbers that are going to be necessary to justify these high prices,†he said.
So far, the main pain seems to be isolated to momentum plays like biotechnology stocks. The iShares Nasdaq Biotechnology ETF fell 5.61 percent.
Such companies have soared on expectations for new products and therapies. But now investors are looking for proof that those efforts are working.
Among the biggest losers on the Nasdaq were Regado BioSciences, a small biotech firm, which fell 18 percent, and PTC Therapeutics, a biopharmaceutical company working on specialized research, which fell 13.2 percent.
Shares of Gilead Sciences have been under pressure after Congress asked how it could justify the $84,000 cost of its hepatitis C treatment Solvadi. The stock was down 7.3 percent
Even the biggest technology names are getting hit. Google shares fell 4.1 percent, Amazon was off 4.4 percent, and Facebook dropped 5.2 percent.
Jonathan Golub, the chief investment strategist at RBC Capital Markets, said that the movement on Thursday was more indicative of a shift away from high-growth stocks that had been happening since late February.
“The part of the market that’s the most economically sensitive, which is things like banks, industrial companies and the like are doing just fine,†he said.
Instead, companies in the Internet and biotechnology fields, for example, are realigning their prices after outperforming more generally.
“A lot of these companies have very, very attractive growth prospects, but they just got a little expensive the market’s bringing them back in line,†Mr. Golub said. “This is really not about something fundamental.â€
Rachel Abrams, Michael J. de la Merced, Pradnya Joshi and Alexandra Stevenson contributed reporting.
A version of this article appears in print on April 11, 2014, on page B1 of the New York edition with the headline: Fast-Growing Sectors Drive a Market Sell-Off.
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