The major US indices suffered losses last week, but the losses were not broad based. Rather, they were concentrated among the mega-cap stocks and specifically the semiconductor stocks. The Vanguard Mega-Cap Growth ETF (MGK) declined 4.0% this week while the Philadelphia Semiconductor Index dropped 8.8%. The steep drop in the semiconductors was driven by a report that the Biden Administration is considering tightening export restrictions to China, and former President Trump saying Taiwan should be paying the U.S. to defend it while pointing out how Taiwan took away much of the semiconductor production that had occurred in the U.S. Mr. Trump’s remarks were taken rather seriously as he is leading in the polls for the presidential election.
At the start of the week there was also a continuation of the recent rotation of money flowing out of mega-caps and into small-cap stocks and cyclical stocks. At its high for the week, the Russell 2000 was up 6.0%, but it would retreat in the latter half of the week. The Russell 2000 finished the week with a 1.9% gain while. An expectation that the Fed will be lowering rates soon spurred the continued buying interest in the bank stocks, as well as the homebuilders which are seen as beneficiaries of lower rates through the channel of lower mortgage rates. The SPDR S&P Regional Banking ETF (KRE) climbed 7.5% for the week and the iShares U.S. Home Construction ETF (ITB) gained 5.3% this week.
The worst-performing sectors this week were technology (-5.1%), communication services (-2.9%), and consumer discretionary (-2.7%), all of which house mega-caps. The sell-off among the mega-caps was capped off on Friday by a global IT outage that was triggered by a flaw in a technical update CrowdStrike (CRWD) was trying to implement and which affected Microsoft’s (MSFT) operating system. Shares of CRWD fell by more than 11% on Friday.