What Is The Nasdaq Saying To Whom?

Prior to Friday, the performance of the NASDAQ Composite Index led all other stock price indices in performance, and, in my opinion, was an indicator of the future direction of the more diversified market.

Then, on Friday, we experienced an October surprise. The President of the US, the most prominent media political personality in the world, was diagnosed as having contracted COVID-19. An “October Surprise” has been a feature of American presidential politics, and some believe it changed enough votes to swing elections. One should remember that voters do not take a verified test as to why they voted the way they did at the time of voting. There is some evidence that voters tell pollsters what they believe they want to hear, or who they think will win. Thus, there is no verifiable way to know how any specific individual voted, or why.

Most people responsible for the ownership of common stocks are long-term investors, and although they participate in the parlor game of expressing their view that it motivates their voting, it does not. Thus, the movement of stock prices or indices is not guaranteed to be predictive of voting results.

NASDAQ Against the World

Trading began on Friday after the announcement of the President’s medical condition, sending stock prices down by more than 400 Dow Jones Industrial Average (DJIA) points. Sharply fallen prices brought buyers into the market, and by the end of the day, the DJIA was down only -0.48%. What alerted me to something potentially signaling a major change was the NASDAQ falling -2.2%. Since reaching their all-time high on September 2nd, the S&P 500 and NASDAQ have been falling. (Remember my warning that due to changes in composition and weighting, the DJIA is likely to be less reliable due to its greater tech orientation.) Until some time passes, the S&P 500 will be a more useful than the dollar weighted market indicator. By Friday’s close, the S&P 500 had dropped -6.49% for the month since achieving its high point. Over the same period, the NASDAQ fell -8.14%, the difference being Friday’s price movement. Thus, Friday’s bigger decline could be significant.

What Did NASDAQ’s Friday Bigger Drop Signify?

The NASDAQ index is labeled “tech-heavy”, and consequently, the performance of tech stocks is disproportionately important to its investors. The only two mutual fund investment category averages gaining over 30% through the Thursday year to date period were Precious Metals +35.68%, and Global Science & Tech +35.27%. (Five other investment categories were up in excess +20%).

Someone with an eye on the political statements made by the leading candidates, and more significantly by some other political leaders concerning the large Tech companies, might ponder the implications of Friday’s tech stock price movement. The popular view is that the Democrats would like to see the economic marketing power of the leading tech companies restricted. Is that the reason the “tech heavy” NASDAQ Composite Index declined materially on Friday? (Prior to Friday, the NASDAQ’s decline from its peak was right in line with the fall of S&P 500.) What makes this view curious is that most CEOs of tech companies are major Democrat supporters. (It is not unusual for successful candidates, upon being elected, to turn on their supporters and attempt to broaden their mandate.)

Changes in Marketplace Structure Could Be More Important Than NASDAQ Price Movements

While most investors only pay attention to the movement of the prices of their stocks, I also focus on the “inside baseball”. Who is executing and initiating the orders and how their marketing efforts are influencing what we think about their investments. It is interesting that there is rising concern over the marketing power of major tech companies, while there seems to be a parallel concern in the investment marketplace. Recently, it was noted that the five largest asset managers, in aggregate, manage more dollars than attributed to the US GDP. Even greater concentration was indicated by two announcements this week.

Wilshire Associates, a data supplier and asset manager, was sold to two private equity managers willing to provide more capital to expand Wilshire’s business. Also this week, Trian Fund Management announced that they have taken a 9.9% position in both Invesco and Janus Henderson, and announced that there should be greater merger & acquisition activity in the investment management business. These smart people were successful with their investment in Legg Mason (NYSE:LM), generating a gain of 55% for them. This area is of great interest to me, as I manage a private fund invested in Financial Services stocks.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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