First it was a rout in the stay-at-home names that surged in the pandemic. Then speculative software makers with barely any earnings went south. Now the giant technology names whose sway on benchmarks has been decried by bears for years are dragging the market down.
Dizzying as the downdraft has been, you can’t say you weren’t warned.
It’s axiomatic in markets: you never see it coming. But this selloff is an argument that sometimes you do. People have been saying for months that inflation would surge, forcing the Federal Reserve into action. Wall Street veterans like Charlie Munger spent 18 months lambasting the Robinhood crowd for its infatuation with speculative flotsam. Warnings the market would bend under its trillion-dollar tech monopolies have never been hard to find.
While the timing was often wrong, it’s hard to say those views aren’t playing out now, with the S&P 500 falling for five straight weeks, its longest retreat in a decade. The index has slumped 14% from a record on the year’s first trading day, wiping about $6 trillion from its value.
“The normal signs of excess have been out there for a while, whether it be in valuation, whether it be in all the speculative overshooting of some of these stock that have great stories but not a real solid business underneath them,” said Michael Ball, managing director of Denver-based Weatherstone Capital Management. What starts as a trickle “turns into a bigger outfall as everybody starts to say ‘I need to take off risk’ and nobody wants to take the other side.”
Equity selloff spread from risky corners of the market to quality stocks
Saying the market is acting in a predictable way sounds crazy after the week that just ended. Hawkish pronouncements by the Fed on Wednesday were occasion for a 3.4% surge in the Nasdaq 100, before the whole gain was unwound a day later. Treasury yields buckled and jumped, making Thursday only the fourth time in 20 years that the main stock and bond ETFs both lost 2% at the same time.
Through a broader lens, the results look a little less disorderly. For the Nasdaq 100, which traded at almost 6 times sales as recently as November, the bull market is over, its five-month loss exceeding 23%. More speculative companies as proxied by funds like Ark Innovation ETF (ticker ARKK) are nursing losses of twice that. Faddy groups like special purpose acquisition companies have suffered similar dents, while losses in the older-school industries repped by the Dow Jones Industrial Average are lower by a relatively tame 10%.
“In a lot of ways, it’s following a typical playbook,” said Jerry Braakman, chief investment officer and president of First American Trust in Santa Ana, California. “Market leadership is the losing leadership. That’s when the panic sets in.”
Of course, just because it makes sense doesn’t mean everyone was ready for it. Dip-buyers were in evidence through the start of this month, with bounces like Wednesday’s giving bulls hopes. Until April, investors had kept funneling money into equity funds, sticking to their dip-buying strategy.
“Investors tend to say, ‘this time is different,’” said Sam Stovall, chief investment strategist at CFRA. “Investors get tired and say, ‘I’m not going to fight the tape, because even with higher multiples, the market just wants to keep going up.’”