The Hubris Bear Market Has Arrived

The Hubris Bear Market Has Arrived

US equities skirted what could have been another sizable weekly loss thanks to a manic Friday afternoon rebound, but for anyone who piled into last year’s winners on the assumption they’d keep winning, the bear market is here.

The rotation in favor of pandemic laggards is unmistakable. The most obvious manifestation is the outperformance of energy shares and bank stocks. The juxtaposition with the big-cap tech is stark.

The simple figure (below) speaks volumes about the shifting zeitgeist. Cathie Wood’s flagship fund fell on hard times amid surging US yields, while “old” energy and financials caught fire (in a good way) as oil surged and the curve steepened.

The “bigger picture” is a “secular low point for both inflation and interest rates,” BofA’s Michael Hartnett wrote. “Inflation assets [are] increasing sharply.”

For pandemic winners and corners of the market derided as bubbles, disaster looms. Bloomberg called it “the curse of a strengthening economy.” Hartnett simply noted that “froth is down sharply.”

“Froth” is a subjective term when applied to markets, but I’d argue it’s more objective than “bubble.” The dictionary definition of “froth” (or its synonym “foam”) is “a mass of small bubbles in liquid caused by agitation.” That conjures coffee house moments or attempts to siphon off the top of a poorly-poured draught beer. In either case, something is spilling over the edges. The visual (below), depicts an epic de-frothing across a number of celebrated tickers.

Drawdowns in Tesla, Zoom, Peloton, the ARK Innovation ETF and the solar ETF are all 25% or more. Bloomberg aptly calls them “poster children for market froth,” and notes that all have recently met “one definition of a bear market.”

This week, the Hang Seng Tech index slid into bear market territory, prompting me to suggest that perhaps — just perhaps — a global tech bear may have arrived. Casual observers probably wouldn’t go that far until the Nasdaq falls 20%. We’re a long way from that eventuality.

Still, the sudden slump in names that many assumed were “can’t-lose” propositions will be disconcerting. It may simply be that some of the froth needed to be siphoned, but at some level, it speaks to the perils of assuming the future is here now.

True, stocks pull forward future outcomes, but as a society, we’re nowhere near a wholesale abandonment of fossil fuels, Teslas are still a relative rarity, people still like to run (and bike) outdoors, and Zoom bloopers have become a mainstay on social media. Indeed, we may have hit “peak Zoom” early last month, when Rod Ponton, a county attorney in Texas, briefly appeared as a cat during a hearing.

The figure (below) is what it looks like when “winners become losers,” as Bloomberg put it, in the same linked article above.

That’s the largest drawdown since the financial crisis, if you’re keeping track at home, where you’re likely inclined to stay — at least for another couple of months, until your local bartender has been vaccinated.

So, what happens next? Well, momentum strats may need to rebalance, for one thing. That could entail additional problems for tech and pandemic winners to the extent it adds fuel to the rotation evident in the visual (below).

But beyond that, there’s some concern that the next “phase” (if you will) could usher in a new, more volatile regime.

“[The] investment clock says once inflation [is] visible the curve bear flattens,” BofA’s Hartnett said this week, in the same note cited above. That, he remarked, is positive for volatility, dividend-yielders, and defensives.

As for the evolution of the macro backdrop and the socioeconomic situation in the US, Hartnett wrote that “the coming years will be marked by bigger government, a smaller world, dollar debasement (inflation solves debt), and a populist electorate voting for UBI & MMT.”

All of that, he suggested, will be in the service of “fight[ing] the War on Inequality.”

Inflation assets will triumph over deflation assets in that environment, he went on to say, characterizing the rotation as “buy humiliation, sell hubris.”


7 thoughts on “The Hubris Bear Market Has Arrived

  1. I remember looking at the charts of TSLA, ARKK and other high valuation uber growth equities at the start of the year and thinking “this is not sustainable.” I made the mistake of placing a put spread on TSLA only to see my premium vanish and it continued to climb, once I closed the spread the stock declined precipitously towards the strike that would have made my trade quite the winner. Anyway, some of the bank and oil company charts are starting to look similarly stratospheric and unsustainable, but I would not dare short anything in this market, I rather risk buying the dip in mega cap, they might underperform for a while but in the end Amazon will still take over the world…

  2. Most Ark and a lot of solar and EV ETFs have Tsla. There’s a nice little daily fixed, 3x leveraged bear etf that’s done very well over the last 10 days. Once all this new margined cash has been rinsed there should be some babies swimming in the old bath water. Tsla is deeply ingrained in the etf world and still has a pe of 961

  3. I prefer tech such as aapl, avgo, msft, googl and even amzn- which can grow in wealthy and also less wealthy areas of the world. Wealthy economies have considerably less inherent population growth than less wealthy nations, so a business than can do well in both arenas is more appealing- especially against the backdrop of a long term trend of a rising global middle class.
    When the term “Tech” is used, I am never sure what specifically is meant as it encompasses too broad of a group – including both stocks and stonks.

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