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NOTES ON MY SCORECARD
-- If you ever wanted a classic example of the perversity of markets, it’s this: stocks rose dramatically last year when covid was ravishing the country, and then stocks fell dramatically once the virus was largely tamed and sidelined.
-- The difference-maker has been the Fed: It added liquidity when prospects for the economy were poor during the pandemic, and has withdrawn liquidity once the economy regained its composure.
-- Unfortunately, investors tend to run to extremes. The S&P 500 and Nasdaq have fallen for six straight weeks, smashing through one-year lows without hesitation. When lows are undefended, bears are only emboldened to sell harder and faster.
-- Still, I would caution against extreme pessimism. Inflation shows signs of peaking, supply chains are becoming unkinked and the Fed has hinted that both its verbal posturing and actions could become less hawkish in coming months if it looks like the economy is slowing faster than its models and officials’ intuition expected.
-- Undercutting this optimism is growing evidence that demand has peaked as consumers grow more cautious and company capex plans thin out. Troubles at the financial transaction giants Mastercard and Visa as well as ace retailers Costco and Amazon are evidence of weak demand among confused, concerned and irritable consumers.
-- Even after its 3.6% gain on Friday, the Nasdaq 100 is still down 8.5% since the Fed meeting a couple of weeks ago and it’s down 24% on the year.
-- The differential among certain factors’ influence on investors is dramatic: The S&P 500 is down 15.2% this year, a massive 9 percentage point advantage vs the Nasdaq. … The growth half (IVW) of the S&P 500 is down 23.25% this year while the value half (IVE) is only down 6.3%. …. The SPDR S&P High Dividend fund (SPYD) is actually up 4.5% this year, an insane 19 percentage point advantage over the S&P 500. … The SPDR Energy (XLE) is up 47% this year while SPDR Consumer Discretionary (XLY) is down 25.4%, a crazy 72-point differential!
-- Lastly, a comment from Nick Colas of DataTrek Research: “The NASDAQ has fallen more quickly from its November 2021 highs than it did as the dot com bubble began to burst right after March 2000. We don’t think the NASDAQ is predestined to repeat its 75% decline from 2000–2002, but the lessons of that era are still valuable today. Lower interest rates won’t save US large cap growth stocks. Tradable lows occur with a 36+ VIX close. Most importantly, the final low comes when least expected. The NASDAQ’s October 2002 lows occurred the same week the US Congress signaled its approval for Gulf War II.
-- More from Colas: “The NASDAQ hit its all-time high on November 19th, 2021 at 16,057. That was 120 trading days ago, and the NAS is down 29 percent since then. … At the peak of the dot com bubble, the NASDAQ topped out at 5,049 on March 10th, 2000, and 120 trading days later it was down 19 percent. …
-- Continuing: “This simple observation reminds us of an old piece of advice about interpersonal relationships: ‘when someone shows and tells you who they really are, believe them’. The same holds true for asset prices. It is better to understand why the NASDAQ is fading so quickly than to argue that the market has it wrong or “it’ll come back”. After all, this basket of brand-name US growth stocks has flipped from market darling to cast-off very quickly. Faster, in fact, than at the start of the most notorious shift in investor sentiment in living memory. … We think the 2022 NASDAQ is even worse than the 2000 NASDAQ because all the sorts of events that unfolded from March 2000 to the index’s lows in October 2002 are happening in one fell swoop now: Aggressive monetary policy at the Fed, recession worries, geopolitical uncertainty and an oil price shock.”
-- Here is what Colas thinks all this means: As much as the NASDAQ 2000 – 2002 comparison is a harsh one and we don’t see the index dropping by 75 percent before bottoming, investors should respect the fact that the speed of the selloff is an important signal. … Understand that the NASDAQ is trading very poorly because it has been hit with a range of shocks that have no easy or immediate remedies.These are broadly analogous to 2000 – 2002 but are developing simultaneously rather than sequentially. … There will be an investable bottom to the current NASDAQ bear market and, by extension, for US equities. History says it will come when it is least expected and on higher volatility than we have today. Until that setup unfolds, we think continued caution is the right approach for investors to take.”