Nasdaq down 2.8% while Dow hits record high: Similar to July 2024? US stocks and New NISA this week
The Nasdaq Composite Index fell 2.14% on Friday, October 16, marking a 4.48% decline for the week, its largest weekly drop since June. Meanwhile, the Dow Jones Industrial Average rose 0.67% during the same week, with the gap between the two indices exceeding 5 percentage points. This divergence is believed to have occurred because semiconductor and software stocks were sold off due to concerns over the debt of AI-related companies, with that capital shifting into energy and defensive stocks. For those investing in the S&P 500 or All Country World Index (ACWI), the impact was a ‘1.95% decline’ for the period.
Chapter 1: What happened: Nasdaq down 2.14% on Friday, crude oil nearing $110
The closing prices of major indices on Friday, October 16, were as follows:
・Nasdaq Composite Index: 26,140.03 (down 572.99 points, 2.14% lower)
・S&P 500: 7,659.44 (down 84.62 points, 1.09% lower)
・Dow Jones Industrial Average: 52,002.41 (down $175.28, 0.34% lower)
The Dow, which had risen $556 the previous day, also saw a slight decline. The drop was centered on high-tech stocks. By sector in the S&P 500, information technology saw the largest decline at over 3%, while energy rose 2.5%.
Among individual stocks, semiconductors were sold off, with Micron Technology (MU) down 5.6%, Intel (INTC) down 5.8%, and Broadcom (AVGO) down 4.5%. CoreWeave (CRWV), which leases AI data centers, fell by more than 11%. On the other hand, Exxon Mobil (XOM) rose 2.5% and Chevron (CVX) rose 2.6%.
On the same day, due to tensions surrounding the Strait of Hormuz in the Middle East, Brent crude oil futures rose 3.7% to close at $109.86 per barrel, and US WTI crude oil futures rose 3.5% to close at $101.41. Brent touched the $110 level during trading, a first since May.
Chapter 2: How the market reacted: A gap of over 5 percentage points between Nasdaq and Dow in one week
The weekly performance compared to the closing prices on the previous Friday, October 9, is as follows (calculated by the author; consistent with reported figures):
・Nasdaq Composite Index: 27,366.17 → 26,140.03 (4.48% decline)
・S&P 500: 7,811.54 → 7,659.44 (1.95% decline)
・Dow Jones Industrial Average: 51,654.95 → 52,002.41 (0.67% gain)
According to the author’s calculations, the difference in weekly performance between the Nasdaq and the Dow is 5.15 percentage points. The S&P 500 fell right in between.
Interest rates barely moved that day. The 10-year US Treasury yield was around 5.09%, down only slightly from 5.10% the previous day. The dollar-yen exchange rate was also around 158 yen, almost the same level as the day before.
This brings us to the question of this article: Why did only the Nasdaq fall by 4.5% in a week while the Dow ended higher, despite being in the same US stock market and under the same interest rate environment?
Chapter 3: Why it reacted that way: ‘AI fueled by debt’ was sold, while crude oil and defensive stocks were bought
The answer is that the selling this week was not driven by interest rates, but by concerns over ‘whether AI-related companies can continue to borrow money,’ which concentrated in sectors heavily represented in the Nasdaq.
The starting point is the difference in the composition of the indices. The Nasdaq Composite has a high weighting of tech stocks, so the price movements of semiconductors and software are directly reflected in the index. The Dow Jones Industrial Average is a price-weighted average of 30 companies, with a smaller weighting for semiconductors and a larger presence of energy, financial, and healthcare companies.
Furthermore, the reasons for selling were skewed toward tech stocks this week. Anxiety grew that the repayment burden might become heavy for companies that have raised large amounts of money through corporate bonds to expand AI data centers. It has been reported that the yield on CoreWeave’s corporate bonds has risen to nearly 15%. Rising corporate bond yields mean that lenders are demanding higher returns. As a result, semiconductor and software stocks, which sit atop the chain of AI investment, were sold off.
On Friday, rising crude oil prices added to this. When oil prices rise, stocks are bought in anticipation of increased profits for energy companies. On the other hand, it is a headwind for high-tech stocks, which are priced high based on expectations of future profits, due to concerns that inflation will rise further. Thus, money moved from tech stocks to energy stocks within the same day.
A similar situation occurred on July 17, 2024. On that day, the Nasdaq Composite fell 2.8%, while the Dow rose 0.6% to hit a record high. It was a day when money moved from tech stocks to other stocks, triggered by reports of semiconductor regulations. The Nasdaq continued to fall until early August before recovering. While the trigger back then was news of regulations, the difference this time is that two factors—corporate debt and crude oil—which are unlikely to disappear quickly, are overlapping.
Chapter 4: Impact on New NISA and US stocks: S&P 500 down 1.95% for the week, about 2% down even in yen terms
For those who are accumulating S&P 500 or ACWI (All Country World Index) investment trusts through the New NISA, the movement this week translates to a 1.95% decline for the S&P 500. Since the dollar-yen rate is around 158 yen, almost the same as the previous weekend, the decline in yen terms is also about 2% according to the author’s calculations.
・Short-term: As long as discussions about the funding of AI-related companies and movements in crude oil continue, indices with a high weighting of tech stocks are likely to experience greater volatility. Nikkei 225 futures ended the night session more than 1,600 yen lower than the Osaka closing price, which may impact the Tokyo market on Monday, October 19.
・Long-term: The S&P 500 and All Country World Index (ACWI) include not only tech stocks but also energy, financials, and healthcare. As seen this week, the mechanism of investing in diversified indices works by having gains in one sector mitigate losses in another.
・Currency: Since the dollar-yen exchange rate barely moved this week, the price movement in yen terms was almost identical to the movement in dollar terms.
Here are three sectors that showed impact from this week’s movements. Company names are provided as examples of sectors and are not recommendations to buy or sell.
・Semiconductors/Memory: Sensitive to both the momentum of investment in AI and the source of that funding (e.g., Micron Technology (MU)).
・AI Data Center Operators: A sector with a high reliance on borrowing, making it susceptible to interest rates and corporate bond prices (e.g., CoreWeave (CRWV)).
・Energy: Tends to be bought when crude oil prices rise, but moves in the opposite direction when crude oil falls (e.g., ExxonMobil (XOM)).
Chapter 5: Numbers to check next: Tesla earnings on October 21 and the FOMC/Microsoft earnings on October 28
Whether the outlook for this past week is correct can be verified through two upcoming events.
The first is the earnings report for Tesla (TSLA) scheduled for October 21, US time. This marks the start of the earnings season for major tech companies. If they can demonstrate that the money invested in AI is returning as revenue and cash flow, concerns about debt will ease. The benchmark will be whether the Nasdaq returns toward the 27,000 level seen at the end of the previous week or falls below 26,000.
The second is the Federal Open Market Committee (FOMC) meeting on October 27-28 and the Microsoft (MSFT) earnings report scheduled for the 28th. The target range for the policy interest rate is currently set at 3.75–4.00%. If Brent crude oil settles above $110, concerns about inflation will strengthen expectations for rate hikes, while if it falls below $100, the headwinds for tech stocks will weaken.
The author has not changed their accumulation settings even during this week when the Nasdaq fell 4.5%. This is because they follow a rule of buying the same amount every month to utilize the mechanism where gains and losses in different sectors within an index cancel each other out.
Conclusion
The market movement at the beginning of this week, when AI-related stocks were sold off due to the upside surprise in US CPI, is summarized in the October 15 flash report.
Rate hike probability rises from about 22% to the 40% range; AI stocks sold and stocks bought following 3.7% US CPI
The details of where the semiconductor companies sold this week derive their profits—whether from design, manufacturing, or equipment—are explained in the thematic stock list.
List of US AI semiconductor stocks | Why profit shares differ between design, manufacturing, and equipment
The reason why stocks with high valuations based on expectations of future earnings are more prone to sell-offs is summarized in the P/E ratio glossary, along with examples of how the same number can be interpreted as either undervalued or overvalued.
What is P/E ratio? The meaning of Price-to-Earnings ratio and why the same 20x can be seen as both cheap and expensive
In this note, I select one event every day and briefly summarize its connection to the New NISA and US stocks. Please follow if you like.
This article is for informational purposes only and does not recommend the buying or selling of any specific stock. Please make your own investment decisions.