It’s been several months since I surveyed the macro landscape, with a well-received article that I called “There’s a storm coming”.
In that article, I talked about a future scenario when asset prices more closely reflect financial reality. In that article, I said “The bubble stocks, while fun to hold during the boom, will then be seen as the financial equivalent of nuclear waste.”
Well, markets have been stormy since I wrote that article on February 3rd.
The biggest US stocks have fallen by the following percentages:
Apple ($AAPL): minus 15%
Microsoft ($MSFT): minus 13%
Alphabet ($GOOG): minus 20%
Amazon ($AMZN): minus 24%
Tesla ($TSLA): minus 17%.
And some of the large bubble stocks have slumped:
Carvana ($CVNA): 80% collapse.
Affirm Holdings ($AFRM): 75% collapse.
Coinbase ($COIN): 70% collapse.
Unity Software ($U): 67% collapse.
Rivian Automotive ($RIVN): 66% collapse.
But (you knew this was coming): there is no reason to believe that this is anything more than the opening salvo in the long-overdue bear market.
Let’s take the NASDAQ Composite Index as a key indicator of bullish gusto.
This reached 16,200 last October, and is now down at 11,300. That’s a fall of 30%, so we can safely call it a bear market.
But the values that prevailed in this index pre-Covid weren’t exactly sober calculations of intrinsic value, either. Pre-Covid, in February 2020, this index was trading at merely 9,800!
That was 27 months ago. How much additional value have NASDAQ companies really created over that timeframe? According to the markets, the additional value creation has been solid, and investors have been rewarded with a capital gain of 15%!
So while the pain experienced by market bulls over the past few months is very real, they still haven’t experienced anything approaching a real, long-term bear market.
The NASDAQ 100 trailing P/E ratio is still around 27x, with the forward P/E around 21x (by my estimates, using WSJ data). The trailing P/E ratio for the S&P 500 is around 21.5x, with the forward P/E around 17x.
These multiples are attractive with the investor assumptions which became mainstream over the past 10 years, but which are at last being interrogated.
For one thing, official US CPI inflation is staying stubbornly at 40-year highs. EU inflation is similar. On Twitter, #inflation and jokes about petrol prices are all the rage - and the ordinary consumer is raging.
For another thing, interest rates are forecast to keep rising, as the Fed attempts to put the ketchup back in the bottle.
Bubble stocks and exotic crypto tokens looked like viable investments in a world where returns on cash were de minimis and where inflation wouldn’t take a bite out of your returns.
But when the returns on those investments will struggle to beat either inflation or fixed interest rates? Then investor appetite can, and in some cases already has, rapidly vanished.
The question now is whether this newfound realism will spread from crypto, tech and meme stocks to the market as a whole. Like the NASDAQ, the S&P 500 is also up 15% compared to its pre-Covid high.
If you think that the pre-Covid markets were horribly expensive then, like me, you’ll be waiting for those pre-Covid levels to be pierced.
If markets were trading significantly below those levels, then maybe I would start to get interested in the value that was on offer.
Until then, to use a military phrase, I would stay frosty.
Best wishes
Graham