Investors allegedly don’t like the data privacy controversy engulfing Facebook, and that worry — along with rate hike and trade war fears — pushed the stock market sharply lower Monday.
Facebook has come under fire after a political intelligence firm accessed the profiles of more than 50 million users without their permission, an episode that raised questions over privacy and why Facebook didn’t alert users.
Investors also worry that Facebook and other social media companies could come under incremented regulatory scrutiny.
The troubles for Facebook, which is one of the most famous stocks on Wall Street, spread to the broad stock market.
Facebook shares closed down $12.53, or 6.8%, to $172.56, a swoon that has wiped out roughly $30 billion of the stock’s value. It was the stock’s worst one-day plunge since March 26, 2014, when it tumbled 6.94%, according to FactSet.
Shares of the other FAANG stocks — an acronym that also includes Amazon, Apple, Netflix and Google parent Alphabet — also were down. Including Facebook, the FAANG names lost an estimated $69 billion in market value Monday.
A tech industry in the crosshairs of regulators is a negative, according to Wall Street.
“A ‘techlash’, or political backlash against the concentrated power and influence of leading U.S. technology companies, is building and gaining momentum,” says Joe Quinlan, chief market strategist at U.S. Trust. “Investors fear that more regulation and political oversight is coming to ‘Big Tech’, a prospect that could impinge on future earnings.”
Wall Street, Quinlan adds, is also worried about a related risk: “Rising digital protectionism, as more governments, like the European Union and China, clamp down on the monopolistic positions” of the big tech companies.
Facebook’s problems have hurt the Nasdaq composite the most. The tech-packed index closed 1.8% lower, with the Dow Jones industrial average, which doesn’t include Facebook, off 1.4%.
The FAANG stocks have been driving the market higher, partly due to their strong sales and profit growth but also because the Nasdaq is a market-weighted index. That means the price moves of stocks with higher market values have a bigger impact on the index. In good times, that positive feedback loop pushes the Nasdaq higher, but the reverse happens when Facebook and the other famous tech stocks are falling in price, explains Brad McMillan, chief investment officer at Commonwealth Financial Network.
“When the (stocks) start to reverse, these big companies can have a disproportionate effect on the downside, and that is what we are seeing with Facebook today,” says McMillan.
Tech stocks now account for more than 25% of the broad Standard & Poor’s 500 stock index, with the financial stocks the next largest at nearly 15% of the index, according to S&P Dow Jones Indices. And a lot of investor cash has been rushing into the famous and well-performing tech sector.
“Facebook (is) likely a symptom of an over trusted tech sector,” says Bruce Bittles, chief investment strategist at Baird. The record level of cash flowing into stocks and ETFs, or exchange-traded funds last week, “suggests lots of optimism and a big percentage of that money went into tech.”
But Facebook’s troubles aren’t the only thing weighing on stock prices. Other worries include:
Interest rate angst
The Federal Reserve kicks off a two-day meeting on interest rates Tuesday. The nation’s central bank is widely expected to hike short-term interest rates a quarter of a percentage point.
But what Wall Street fears is if the Fed and its new chairman, Jerome Powell, signal that they now see four rate increments this year, one more than the three signaled in December.
“We think we know what Powell and the Fed will do, but we are not really sure,” McMillan says.
Trade war fears
Wall Street is also worried about the probability of a trade war resulting from President Trump’s threatened move to levy additional tariffs on trading partners, including China, beyond the import taxes he has already slapped on steel and aluminum. Fears of retaliation from countries around the globe has Wall Street worried, as an all-out trade fight is seen as a negative for both the U.S. and global economy.