It’s been an ugly start to the year in the stock market, and many on Wall Street are bracing for it to get even uglier. On Jan. 26 the S&P 500 index was almost 10% below its last high, which was reached on the first trading day of 2022. The Nasdaq-100 index was off more than 14% from its peak in November, while the Russell 2000 Index of smaller companies was down 19% from its latest high.
Market pundits seemed more shaken than those numbers alone would suggest, with talk of long winters and bursting bubbles even amid late-in-the-day rallies as traders tried to “buy the dip.” Perhaps that’s because there’s a sense that the markets are, for the first time in a while, going to have to grit out losses without help from an accommodating Federal Reserve. And while companies themselves are healthy—with strong balance sheets that could eventually help put a floor under equity losses— the long-reigning expectation that risky assets will mostly go up seems to have been broken.
Look beyond the major benchmarks, and it’s easy to find examples of 50% losses—or worse. Cathie Wood’s ARK Innovation ETF, the darling investment vehicle of the pandemic era that soared 153% in 2020, is down almost 56% from the high it touched in February of last year. Cryptocurrencies have been devastated: The price of Bitcoin has been cut almost in half since it sold for nearly $69,000 just two-and-a-half months ago; Ethereum is down even more over the same period.
In other words, the most speculative stuff is leading the way down. It’s almost as if the markets are holding a stress test to find out what’s real and what isn’t. Comparisons to the bursting of the dot-com bubble, which knocked almost 83% off the Nasdaq-100, are inevitable. Unlike the Covidinduced bear market of 2020, there hasn’t been an external shock to the system. Instead, investors are once again reassessing their dreams of future business successes and the nosebleed valuations they’ve been paying. Following the rally over the last two years, most marketwide valuation measures were on par with or even exceeded, the highest of the frothy days of the dot-com bubble. Cryptocurrencies were (and are) even more vulnerable to a sudden shift in investors’ faith.
Yet turn-of-the-century parallels should only be taken so far. The tech-heavy Nasdaq-100 of today, though richly priced, is dominated by very profitable companies that represent the heart of the economy. And the current environment is still a product of a unique historical circumstance: an economy and market ravaged by a raging pandemic, only to be jolted back to life by a combination of government and central bank stimulus of unprecedented size. In fact, it’s actually that brisk rebound in the economy that’s to blame for much of the stress. The demand side of the economy has been turbocharged at a time when the supply side is still struggling to get back to normal, causing consumer prices to jump 7% in the hottest inflation reading in almost 40 years.
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