Traders on the floor of the NYSE, May 13, 2022.
Brendan McDermid | Reuters
People with anxiety and trauma are sometimes asked to identify a hierarchy of fears that cause distress so they can be managed.
Wall Street is nervously facing a host of fears right now that have shadowed the broader market on its way to a near 20% drop following Thursday’s emergency sell-off and still holding up after a strong rally and probably 2.4% overdue on Friday.
The key real-world economic volatility factor is, of course, whether ongoing inflation, tough consumption and tightening financial conditions could spell a recession flare in the coming quarters.
But from an investor’s point of view, with the damage done and the factors driving index performance and wealth on paper, the top fear is that Nasdaq is following the scenario from a bear market. after the peak of 2000-2002.
Without foretelling the rapid sales storm of recent months, I noted here earlier this year that there are enough parallels to keep the anxiety going: Years of tech stocks’ dominance , large market concentration in a small number of digital economy winners, star fund managers who demonstrate “new era” thinking while disregarding valuation methods traditional.
And the recent tempo Nasdaq The sell-off somewhat resembles the action following the March 2000 bubble top, a rapid 30% drop in a few months. The difference between a 25% discount on the Nasdaq is a great buying opportunity, and the onset of this pain entirely depends on whether the 2000-2002 rules apply.
Bespoke Investment Group has scanned all of Nasdaq’s 25% declines as well as 20% over 30 trading days. Both conditions apply to the current Nasdaq slide. Apart from the periods starting in 2000, each drop led to huge profits in the following year. The cases dating back to 2000 – when the Nasdaq’s first 30% drop in months led to another 68% recession in more than two years – were a dangerous trap for buyers.
And back then there were two kinds of tech plays – speculative emerging “story stocks”, hundreds of which went public in 1999 alone, many with minimal or no sales – and the instigated winners of the computer and network age, profitable but fairly overrated. This partly reflects today’s split between the unprofitable “disruptors” that peaked more than a year ago and the Nasdaq megaliths known as FAANMG.
Back then, thin, low-quality stocks exploded and eventually even the high-quality winners succumbed. Microsoft – then one of the two biggest on the market – fell more than 60% during the 2000 -’02 bear market. Cisco is down 90% and even the trusty old Hewlett-Packard is down more than 80%.
This is where the dramatic difference between now and two decades ago comes in to offset some of the worst fears.
There’s more air below the Nasdaq Composite at its March 2000 high. It has gained more than 500% in the previous five years, compared with 200% in the five years leading up to the most recent Nasdaq record about six months ago. The momentum that spiked in early 2000 was so intense that Nasdaq hit fuselage shaking 55% above its 200-day moving average; At the beginning of November last year, the difference was 12%.
And to illustrate the current valuation gap compared to then, Microsoft at its 2000 peak was trading at more than 60 times earnings forecast and would fall 22 times from its 2002 low. Its number peaked this cycle around 35 and has dropped to nearly 24.
In fact, the Nasdaq in the late ’90s was often made up of stocks that were less mature, more volatile, and more valuable than today, when its five biggest companies were also the top five. in the US market as a whole.
Nasdaq of the year 2000 looks like ARK Innovation Fund (ARKK) in this regard, a higher-octane, riskier segment of the market. And the price action there has matched the old Nasdaq bust action pretty well, as Chris Verrone of Strategy Research has tracked. In fact, ARK has observed Nasdaq’s collapse so far, suggesting that perhaps most of the calculations in the speculative tech arena may have been on track.
Investors have now been put off six months since the Federal Reserve began to turn sharply toward the more hawkish outlook of raising interest rates and bleeding down its balance sheet.
However, Chairman Jerome Powell’s determination to convey his anti-inflation intent and tacit recognition that an “economic soft landing” is more aspiration than expectation continues to hover like a fear. It weighs heavily on the risk appetite of investors.
Expectations of half a percentage point rate hikes in June, July and perhaps September are now reflected in the economic consensus and largely in bond prices. Last week, Powell’s comment in an interview that this month he never intends to withdraw if there is a chance or that the 0.75% gain does not seem to discourage bond traders, indicating a general consensus on the policy path throughout. summer.
However, since this path is unlikely to change much even as inflation data starts to decline more rapidly, it gives investors the impression that risk assets are limited (if not more so). severely constrained from here) as the Fed seeks to tighten financial conditions.
This psychological (and financial) disparity is accompanied by a general perception that midterm election years tend to be volatile and sloppy throughout the summer, and concerns that corporate earnings forecasts are vulnerable to cuts.
Of course, low expectations are not a bad starting point for the markets. At last week’s lows, sentiment started taking hold of pessimistic extremes and over a period of several months or more, this is starting to have favorable implications for equity performance.
However, the phrase “Don’t fight the Fed” has become a cliché for a reason, so the indexes will bounce and rally.
Free-falling cryptocurrency prices, synthetic “stablecoins” about to be volatile, signs of emergency liquidation for major tech stocks, severe trading liquidity in stock and banking stocks A deep drop in goods made the public worried about potential financial risks.
This is the question “What if?” factors that signal the market during a correction, perhaps exacerbated now by the sense that the Fed is highly motivated to bail out asset owners in the event of bankruptcy.
So far, no real alarm has sounded in the capital markets. The spread on Treasuries now demanded by petty debt holders is growing but not yet reaching panic levels, but the direction of the move is uncomfortable. There is no reason for fear, but credit terms are still in the hierarchy of fear.
These issues will likely maintain their power to induce fear in a volatile market. In the short-term though, the stock market appears to be dominated by a strategy book revolving around a correction: overreading, short selling, and a recovery attempt require close scrutiny to gauge sustained strength. of them.
Last weekThis column details a set of bearish S&P 500 targets between 3800-3900 based on a variety of technical, fundamental and historical approaches. That zone was hastily tested, Thursday’s low just above 3850.
The rebound from there from oversold levels with S&P 500 only avoid the negative 20% threshold and with Nasdaq 100 having nearly halved the post-March 2020 rally is intuitive, welcome, and relatively impressive – both pleased bears and daydreaming bulls have concluded that the ice has suffered enough for now.
To be sure, the worst-hit stocks have rallied the most, with Goldman Sachs’ basket of tech nonprofits up 12% on Friday but still down 50% this year. Short coverage is rife, but it’s always within correction depth and 90% of the trading volume on the NYSE is bullish, which shows credibility.
The S&P has been so stretched that adopters are willing to assume it can add another 7% from here without threatening the already protracted downtrend. If the rally can ignite more fear to run that far, it will do so in the face of smoldering fears that won’t go away anytime soon but can perhaps now be named and manage.