The Nasdaq is in a clear downtrend. It is still being held up by the ‘generals’, the big tech heavyweights such as Alphabet, Microsoft and the like, but it is important to watch out.
At times of war, the generals are often the last to die. Despite the huge slaughter in fast-growing stocks, the generals, the big American technology stocks, are still holding their own. But that position is faltering. For large stocks such as Amazon, Facebook and Netflix are in the midst of the biggest drawdown of the last decade. The MACD indicator of the Nasdaq is falling rapidly.
Numerous fast-growing companies with weaker credentials have been completely decimated. The story of Cathie Wood’s well-known and now iconic ARKK Innovation ETF is by now well known. It has fallen continuously for about half year to date. That is not too bad compared to the Nasdaq index, which is down about 22 per cent since its peak.
No immunity from bear market
The large technology companies are particularly widespread. There are few ‘growth’ funds where they are not in the top 10 positions. But they can also be found in more value/GARP-oriented funds. This is not surprising; they are companies with a global footprint, excellent management, stupendous cash flows, a rock-solid balance sheet and many other qualities, such as network effects and a broad ‘moat’.
But we may now be in the bear market phase where ‘everything’ is going down. No asset class, especially one with a long duration, can remain immune to a particularly aggressive tightening of liquidity by the Fed, reducing balance sheets by tens of billions of dollars per month, combined with long-term interest rates above 3 percent This is a serious tightening of financial and monetary conditions.
A good example is Shopify, one of the most popular stocks post-Covid, which has fallen as much as 80 per cent in the last six months.
The current forward PE of the Nasdaq is about 23 and that of the S&P 18, but the 2018 bear market ended with a forward PE of 15 for the S&P and of 18 for the Nasdaq. So a decline towards 10,000 points for the Nasdaq and 3,300 for the S&P should come as no surprise.
Equity valuations are inversely correlated with inflation; high inflation in input and consumer prices puts disproportionately more pressure on growth stocks. That is simply a rule of financial markets. The most punitive high-flyers have already experienced this pressure, and there is a real chance that the generals will soon experience it too.
Opportunities are always there, however. For example, more than 20 percent of Nasdaq Biotech components are listed for less than cash value. We have not seen that figure since 2002, according to Bloomberg calculations.
So it looks like investors will have to drink the chalice to the bottom. Until then, valuations, lower-valued emerging markets and especially commodities and food are likely to continue to make good headway, along with the most defensive staple companies.
This article originally was published on InvestmentOfficer.be.
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