Netflix Adds Fuel to Wall Street Sell-off

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Shares of Netflix sank more than 20 percent as investors recalculate valuations on companies that soared on torrid growth earlier in the pandemic
Shares of Netflix sank more than 20 percent as investors recalculate valuations on companies that soared on torrid growth earlier in the pandemic

Netflix saved a big surprise for Wall Street this week. After the market closed on Thursday, the streaming giant reported new subscription numbers that missed analyst estimates. That was a big disappointment for Wall Street, which sent Netflix’s shares sharply lower in early Friday morning trade.

Soon the sell-off spread to other technology shares, as traders and investors awake to the crude reality that no company can maintain high growth rates forever. The Friday sell-off in technology shares added to the previous sell-offs that have sent the tech-heavy Nasdaq down more than 6 percent for the week.

Still, the sell-off was moderated by factors like solid US economic numbers. For example, the December Conference Board Leading Index rose 0.8 percent, following a 0.7 percent rise in November. Moreover, a two-month increase in the leading index bodes for future economic growth, dashing concerns that the economic recovery is stalling thanks to the resurgence of Covid-19 infections.

“The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first quarter, headwinds from the Omicron variant, labor shortages, and inflationary pressures—as well as the Federal Reserve’s expected interest rate hikes—may moderate economic growth. The Conference Board forecasts GDP growth for Q1 2022 to slow to a relatively healthy 2.2 percent (annualized). Still, for all of 2022, we forecast the U.S. economy will expand by a robust 3.5 percent—well above the pre-pandemic trend growth.”

That’s undoubtedly good news for the cyclical sectors of the economy, helping moderate the losses of the economically sensitive shares making up the majority of Dow Jones components.

Another factor that helped moderate losses on Wall Street was a decline in the U.S. Treasury bond yields. For most of the trading session, the 10year U.S. Treasury bond yield hovered around the 1.75 percent mark, down from the 1.85 mark it was trading for most of the week.

Declining bond yields offered a sign of relief for Wall Street across all sectors. After all, the rising bond yields sparked the recent sell-off in technology shares, which tend to be more interest-rate sensitive than the overall market.

Still, the Treasury bond yields decline may not save Wall Street from further sell-offs. While coming down from the recent highs, U.S. Treasury bond yields continue to be at two year high. And there are good chances that they will resume their ascend, thanks to tapering, the rolling back of the Fed’s bond-buying program that is already underway. That would put pressure on bond prices, pushing bond yields higher.

Then there’s the persistence of inflation, which hovers around 7 percent, the highest it has been in 30 years, putting further pressure on bond prices, which could push bond yields even higher.

In addition, inflation could force the Federal Reserve to raise short-term interest rates sooner than later, meaning that the nation’s central bank will begin taking liquidity out of the economy. And the European Central Banks (ECB) could follow suit sooner after, raising interest rates for the eurozone, which has also seen a spike in inflation in recent months. That’s certainly bad news for the shares of the tech companies that trade on a promise that will deliver profits at some point in the distant future.

How much sooner the Fed could raise short-term interest rates? We all know next Wednesday when the Federal Open Market Operation Committee (FOMC) meets and issues its policy statement

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