Last week, I wondered if it was safe to venture into equities now that the stock bubble has definitively popped.
The answer, as it turns out, was “no.” It wasn’t safe. And it probably still isn’t.
In fact, it may not be safe for quite a while, because when bubbles pop, markets tend to overshoot to the downside in an effort to make up for the upside overshoots that accompany periods of speculative excess. Call it “flexible average price discovery.”
Read more: The Stock Bubble Popped. Is It Safe Now?
In the linked article (above), I cited Credit Suisse’s Jonathan Golub, who quantified the scope of this year’s de-rating across the most expensive names.
The 100 most expensive stocks in the S&P 500 began 2022 trading at an astounding 26x premium to the rest of the market, almost double the long-term average. “The market’s YTD correction is largely the result of de-rating of these extremely overvalued names,” Golub said.
The wipeout, exacerbated by a very rapid rise in US real rates, crescendoed on Monday with another dire session for the Nasdaq which, Tuesday’s turnaround attempt notwithstanding, is experiencing a hangover of epic proportions.
“The loss of market capitalization for the Nasdaq in the last six months is truly staggering,” SocGen’s Andrew Lapthorne remarked, marveling at more than $7 trillion in value destruction (figure on the right, below).
Indeed, the Nasdaq 100 shed more than $1.5 trillion in value over just three sessions following the May FOMC meeting. Apple alone lost nearly a quarter trillion from Thursday through the closing bell on Monday, while Microsoft, Amazon and Tesla all bled $170 billion or more.
The demolition in pandemic darlings and high-growth shares continued on Tuesday, even as the broader market attempted to stabilize.
Peloton, a poster child of the pandemic boom-bust trade, plummeted another 10% after third quarter results disappointed.
The simple figure (above) is a ghastly testament to the market’s unfolding Icarus trade.
Amazon, meanwhile, has nearly erased the entirety of its pandemic gains (figure below).
Since reporting a second consecutive quarter of single-digit revenue growth (and guiding for a third) late last month, the shares are down nearly 25% on top of what were already egregious losses.
The decline from record highs equates to more than $780 billion in lost market cap.
“There are clear signs that we’re in the midst of a valuation-led bear market, with the most expensive stocks in the market falling the quickest,” SocGen’s Lapthorne said. “The question is to what extent these losses, along with others, start to reverberate across the broader financial system.”
“Turnarounds are hard work,” Peloton CEO Barry McCarthy mused on Tuesday, in a letter to shareholders. “It’s intellectually challenging, emotionally draining, physically exhausting and all consuming. It’s a full contact sport.”
One could say the same of investing and trading through stagflation.
For some months Charlie Munger and Jeremy Grantham have been speaking in bearish terms about US markets. They have slightly different takes on the longer-term prospects for US markets and the economy. You can find them on YouTube.
The take-away from Chalie Munger was his suggestion that ’22 to ’32 will be a “lost decade” for US investors. He is a thoughtful, layered thinker, but he hits you between the eyes with reality. He cites the Weimar Republic as an example of where US money printing can lead. He points out that real returns will be undermined by ongoing inflation.
Earlier this year, on both Bloomberg and Fox, Grantham asserted we’re in a super-bubble and the S&P 500 will fall by about half. In the Bloomberg Front Row content I saw, Grantham suggested the S&P would be reduced 50% below its recent highs. He also suggests staying out of the hyper-expensive US and finding opportunities in offshore value stocks.
Munger and Grantham are not the final answer. They’re good thinkers that may be helpful, given the evolving market.
I wonder how people who invested outside the US, in let’s say China (Tech!) or Russia have done?
I agree that the numbers are staggering, but then who really thought Tesla was worth more than all the other car manufacturers combined: it’s not “winner take all virtual tech (and patents and network effect moats)”, it’s physical goods with seriously experienced and financed (sometimes nationally, ehm Japan and South Korea and Germany) competitors.
If Apple’s stock value goes down they can just use the piles of cash they have to buy themselves back up
According to the YahooFinance video interview Munger thinks the USD goes to $0 in 100 years which is an outlandish prediction (barring climate change or micro-crypto-payments making it real).
Weimar (post WWI loser) isn’t at all comparable; the meta point that democracies fail due to economics has an interesting echo that the Soviet Union failed due to economics.
What were we talking about again?
Societies fail due to failed economics is more appropriate. Regardless of your form of government, if your economy can’t feed, clothe, and house your people the system of government in place will fail. See the Nazis. See Russia very soon.
I agree with all of your points. Thanks for sharing. I just think it’s a challenge to think about investing, and to consider views from the likes of Charlie Munger and Jeremy Grantham. They have been around, to say the least. As for me, these guys inform my baseline thinking, which helps me to measure the risks I want to take. Today I’m fully invested, including in Chinese fin-techs. I rotated in December and January into established, profitable small-cap tech stocks, on-shore and off-shore. I believe they will yield significant gains in 12 – 18 months. Fingers crossed, of course.
Good luck and best wishes!