Traders on the floor of the NYSE, May 13, 2022.
Brendan Mc Dermid | Reuter
People suffering from anxiety and trauma are sometimes asked to define a hierarchy of fears that trigger distress so that they can manage them.
An anxious Wall Street faces a litany of fears right now that have clouded the wider market on course for a nearly 20% drop in Thursday’s emergency selloff and linger after the strong rebound and perhaps- be 2.4% behind Friday.
Rediffusion of the Nasdaq Y2K crash?
Of course, the crucial real-world economic swing factor is whether ongoing inflation, consumer unease and tighter financial conditions represent the opening of a recession in the coming quarters.
But from an investor’s perspective, given the damage already done and the drivers of index performance and paper wealth, the main fear is that the Nasdaq’s fall follows the post-market bear market scenario. peak of 2000-2002.
Without having predicted the kind of rapid selling storm of recent months, I noted here at the start of this year that there are just enough parallels to sustain concern: years of tech stock dominance, a strong market concentration among a handful of winning digital economy players, star fund managers who embodied “new era” thinking while disdaining traditional valuation methods.
And the cadence of the recent The Nasdaq sell-off somewhat resembles the action after the March 2000 bubble peak, a rapid 30% drop in a matter of months. The difference between a more than 25% drop in the Nasdaq being a great buying opportunity and the onset of pain is entirely dependent on the application of the 2000-2002 rules.
Bespoke Investment Group analyzed all Nasdaq declines of 25% as well as declines of 20% over 30 trading days. Both conditions apply to the current Nasdaq slide. Apart from the periods beginning in the year 2000, each of the declines led to considerable gains in the following year. The cases that began in 2000 – when the Nasdaq’s first 30% decline in a few months led to another 68% collapse over more than two years – were a vicious trap for buyers.
And at the time, there were two classes of technology games – the speculative upstart “story stocks,” hundreds of which went public in 1999 alone, many with little or no revenue – and the anointed winners of the era of computers and networks, which were profitable but valued enough. This somewhat mirrors the current divide between the unprofitable “disruptors” that peaked over a year ago and the Nasdaq megaliths known as FAANMG.
Back then, the flimsy, low-quality stocks imploded, and then even the high-quality winners eventually succumbed. Microsoft – then as now one of the two largest companies in the market – fell more than 60% in the bear market from 2000 to 2002. Cisco crashed 90% and even the former Hewlett-Packard reliable lost more than 80%.
This is where the significant differences between today and two decades ago offset some of the worst fears.
There was a lot more air under the Nasdaq Composite at its peak in March 2000. It had gained more than 500% in the previous five years, compared to 200% in the five years before the Nasdaq’s last record high there. about six months. The surge of momentum in early 2000 was so fierce that the Nasdaq hit a body shake of 55% above its 200-day moving average; at last November’s peak, this gap was 12%.
And to illustrate the chasm in valuations today compared to then, Microsoft at the high of 2000 traded at more than 60 times expected earnings and would fall to 22 times at the tech sector low of 2002. Its multiple peaked this cycle around 35 and is already down near 24.
In fact, the Nasdaq of the late 90s was generally comprised of less mature, more volatile and frothy stocks than it is today, while its five largest companies are also the top five in the entire US market. .
The Nasdaq 2000 is more like the ARK Innovation Fund (ARKK) in this respect, a higher and riskier segment of the octane market. And the price action there matched that of the former Nasdaq bust pretty well, as Chris Verrone of Strategas Research tracked. In fact, ARK has outpaced the Nasdaq crash so far, perhaps suggesting that most speculative tech reckoning could have run its course.
Powell’s Hot Summer
Investors are now six months away from the start of the Federal Reserve’s sharp shift towards a more hawkish outlook to raise interest rates and bleed its balance sheet.
Yet President Jerome Powell’s determination to signal his inflation-fighting intentions and implicit recognition that an “economic soft landing” is more of an aspiration than an expectation continues to loom as the primary fear. weighing on investors’ risk appetite.
Expectations for rate hikes of half a point each in June and July and possibly September are now reflected in the economic consensus and, to a large extent, in bond prices. Last week, Powell’s comments in an interview he never intended this month to rule out luck or a 0.75% rise didn’t seem to bother bond traders, indicating general agreement on the political trajectory during the summer.
Yet because this trajectory doesn’t seem subject to much change even if inflation data starts to pull back faster, it leaves investors feeling that risk assets are capped (if not severely handicapped from here). ) as the Fed seeks to tighten financial conditions.
This psychological (and financial) overhang comes on top of a general awareness that midterm election years have tended to be choppy and sloppy throughout the summer and fears that corporate earnings forecasts are vulnerable to cuts.
Of course, low expectations are not a bad starting point for markets. At last week’s lows, sentiment began to register bearish extremes, and over a period of months or more, this begins to have favorable implications for equity performance.
Still, the phrase “Don’t fight the Fed” has become a cliché for a reason, so expect bounces and feints in the indices.
Patrol in case of accident
Plummeting cryptocurrency prices, synthetic “stablecoins” peeling off, signs of urgent liquidation in big tech stocks, extremely low stock liquidity, and bank stocks in deep skids leave plenty of room for anxiety. in the face of possible financial incidents.
It is a “What if?” factor that confuses markets during corrections, perhaps exacerbated now by the feeling that the bar is high for the Fed to rescue asset owners in the event of a break.
So far, no real alarm is sounding in the capital markets. The spread over Treasuries now demanded by owners of junk debt is up but not yet bumping up to panic levels, but the direction of travel is uncomfortable. Nothing to be afraid of, but credit conditions remain in the hierarchy of fears.
These issues will likely retain their power to trigger alerts in a choppy market. Although short-term, the stock market appears to be ruled by the playbook around corrections: oversold readings, short-covering, and rally attempts requiring careful scrutiny to gauge their stamina.
Last week, this column detailed a confluence of bearish S&P 500 targets between 3800 and 3900 based on a variety of technical, fundamental and historical approaches. This area was hastily tested, with Thursday’s low moving just above 3850.
The rebound from there from oversold levels with the S&P 500 just below the minus 20% threshold and with the Nasdaq 100 having lost almost exactly half of its post-March 2020 rally was intuitive, welcome and relatively impressive. – both contented bears and wishful thinking bulls concluding the strip had suffered enough for now.
Of course, the most devastated stocks rebounded the hardest, with Goldman Sachs’ basket of unprofitable tech companies up 12% on Friday but still down 50% this year. Short coverage was prevalent, but it still stems from correction depth, and 90% of NYSE volume was up, giving it some credence.
The S&P was so stretched that handicappers were willing to admit it could rise, say, another 7% from here without even threatening the entrenched downtrend. If the rally is able to burn more fear to run this far, it will have faced looming fears that won’t dissipate anytime soon but can now perhaps be named and managed.