Most technology companies are nothing like Facebook Inc. So why are their stocks being influenced so strongly by a social network firm?
The question is posed by Goldman Sachs. Strategists led by David Kostin have observed elevated correlations between Facebook and the rest of the industry since mid-March, when Mark Zuckerberg’s company sold off on the Cambridge Analytica scandal. That adds up if the stock in question is Alphabet and Twitter, which rely on user data, but makes less sense for things like gaming or IT services firms.
“We expect correlations in the sector will revert back toward historical averages as investors differentiate between the various headwinds at a micro level,” Kostin said in the note.
He also listed 25 tech stocks that have “underperformed fundamental risk” during Facebook’s plunge (in order of heightened correlation): JNPR, GLW, AMD, QCOM, CSCO, HPQ, KLAC, EA, CDNS, NVDA, PAYX, IPGP, QRVO, TTWO, SNPS, GOOGL, ANSS, EBAY, TEL, NFLX, WDC, WU, GPN, BKNG, XRX.
The Technology Select Sector SPD Fund, whose ticker is XLK, has fallen 4.4 percent since mid-March versus Facebook’s drop of more than 11 percent and the S&P 500’s loss of 3.2 percent.
More broadly, Goldman’s data shows that the average three-month S&P 500 stock correlations have increased from just 9 percent in January to 52 percent today, or the fastest and largest increase aside from 1987.
Kostin said that these correlations are “mean-reverting” and are likely to fall given the idiosyncratic impact of policy risks, adding that equities within the consumer discretionary and health care sectors offer the best stock-picking opportunities.