Anxiety and trauma patients are sometimes asked to define a hierarchy of fears that cause distress so that they can be managed. An anxious Wall Street is currently facing a litany of fears that have overshadowed the broad market en route to a near -20% drop in Thursday’s urgent sell-off and that persist after the strong and perhaps overdue rally of 2, 4% on Friday. Nasdaq Y2K crash performed again? Of course, the crucial real economic swing factor is whether ongoing inflation, consumer slump and tightening financial conditions are the prelude to a recession in the quarters to come. But from an investor’s perspective, given the damage already done and the drivers of index performance and paper wealth, the biggest fear is that the Nasdaq spin will follow the script of the 2000-2002 post-peak bear market. Without predicting the kind of rapid selling storm of recent months, I noted here early this year that there are just enough parallels to keep the concerns flowing: years of tech stock dominance, heavy market concentration among a handful of digital economy winners, star fund managers embodied ‘new era’ thinking while disregarding traditional valuation methods. And the cadence of the recent Nasdaq sell-off is somewhat like the action after the March 2000 bubble peak, a rapid 30% drop in a matter of months. The difference between a 25% drop in the Nasdaq as a great buying opportunity and just the beginning of the pain depends entirely on whether the 2000-2002 rules apply. Bespoke Investment Group has scanned all Nasdaq declines of 25% and 20% declines over 30 trading days. Both terms apply to the current Nasdaq slide. Outside of periods beginning in the year 2000, each of the declines led to significant gains the following year. The cases that started in 2000 — when the first 30% Nasdaq drop in a few months led to another 68% meltdown in more than two years — were a vicious trap for buyers. And then there were two kinds of tech plays — the incipient speculative “story stocks,” hundreds of which went public in 1999 alone, many with minimal or no revenue — and the anointed winners of the computer and networking era, which were profitable but quite high. appreciated. This somewhat reflects the current divide between the unprofitable “disruptors” that peaked more than a year ago and the Nasdaq megaliths that came to be known as FAANMG. Back then, the low quality lean stocks imploded and eventually even the high quality winners eventually caved in. Microsoft — then and now one of the two largest companies on the market — fell more than 60% in the 2000-’02 bear market. Cisco collapsed 90% and even the trusty old Hewlett-Packard lost more than 80%. This is where the significant differences between now and two decades ago come into play to offset some of the worst fears. At the peak of March 2000, there was a lot more air under the Nasdaq Composite. It was up more than 500% in the past five years, compared to 200% in the five years prior to the most recent Nasdaq record about six months ago. Such was the momentum in early 2000 that the Nasdaq hit a rump-shaking 55% above its 200-day moving average; at the peak of last November, this spread was 12%. And to illustrate the gap in valuations now versus then, Microsoft was trading at more than 60 times expected earnings at its peak of 2000 and would fall to 22 times by its 2002 low in the technology sector. The multiple peaked at around 35 this cycle and has already fallen to nearly 24. In fact, the Nasdaq of the late 1990s generally consisted of less mature, more volatile, and foamier stocks than today, while the top five companies also have the be largest. top five in the overall US market. The 2000 Nasdaq is more like the ARK Innovation Fund (ARKK), a higher-octane, higher-risk market segment in this regard. And the price action there matched up pretty well with the old Nasdaq bust, as Chris Verrone of Strategas Research has tracked. In fact, ARK has outpaced the Nasdaq collapse thus far, perhaps suggesting that most of the reckoning in speculative technology could run its course. Hot Powell Summer Investors are now six months away from the start of the Federal Reserve’s sharp turn toward a more aggressive outlook for raising interest rates and deflating its balance sheet. Still, Chairman Jerome Powell’s determination in communicating his inflation-fighting intentions and the implicit admission that an “economic soft landing” is an ambition rather than an expectation lingers as a primary fear weighing on investors’ risk appetite. Expectations of rate hikes of half a percentage point each in June, July and perhaps September are now reflected in the economic consensus and largely in bond prices. Last week, Powell’s comments in an interview that he never intended to rule out the possibility of a 0.75% hike this month seemed unsettled by bond traders, suggesting general agreement on the policy path by the summer. But because this path doesn’t appear to be changing much, even as inflation data starts to bounce back faster, it makes investors feel like risk assets are being capped (if not heavily handicapped from here on) as the Fed tries to tighten financial conditions. to make. This psychological (and financial) overhang is in line with the general realization that the mid-term election years in the summer have often been choppy and sloppy, and concerns that corporate earnings forecasts are vulnerable to austerity. Low expectations are of course not a bad starting point for markets. At last week’s lows, sentiment started to show pessimistic extremes, and over the span of months or more, this is starting to have a beneficial effect on stock performance. Still, the phrase “Don’t fight the Fed” became a cliche for a reason, so bounces and feints in the indexes are to be expected. Accident Patrol Cryptocurrency prices in free fall, synthetic “stablecoins” breaking loose, signs of urgent liquidation in major technology stocks, acutely poor trading liquidity in stocks and banking stocks in a deep slip leave a lot of room for fear of possible financial mishaps. floating “what if?” factor obscuring markets amid corrections, now perhaps exacerbated by a sense that the bar is set high for the Fed to bail out asset owners in the event of a break. So far, there have been no real alarm signals in the capital markets. The spread over Treasuries now demanded by junk debt owners is widening but not yet hitting panic levels, but the direction of travel is uneasy. No reason to be alarmed, but credit terms remain in the hierarchy of fears. These issues are likely to hold their power to stir scare y market in no time. Although in the short term the stock market seems to be dominated by the tactical playbook around corrections: oversold, short-covering and rally attempts that need to be watched closely to gauge their stamina. Last week, this column described a confluence of downside S&P 500 targets between 3800-3900 based on a variety of technical, fundamental, and history-focused approaches. That zone was quickly tested, Thursday’s low coming just above 3850. The jump from there from oversold levels with the S&P 500 just below the minus-20% threshold and with the Nasdaq 100 almost exactly half of its post Lost -The March 2020 rally was intuitive, welcome and relatively impressive – both happy bears and wish bulls concluding that the tape had suffered enough for now. Certainly the most devastated stocks recovered the fastest, Goldman Sachs’ basket of unprofitable tech companies rose 12% Friday, but is still 50% lower this year. Short cover was rife, but it’s always been off correction depth, and 90% of NYSE volume was on the upside, giving it some credibility. The S&P was pulled so tight that handicappers were willing to admit it could climb, say, another 7% from here without even threatening the entrenched downtrend. If the rally is able to burn off more of the fear of running this far, it will have done so in the face of the looming fears that won’t go away anytime soon, but may now be able to name and manage.
Wall Street faces a litany of fears right now, including whether this is a Nasdaq Y2K plunge rerun