This is All Part of the Cycle
by Danno
April was a hellish month in the financial markets. In fact, all of 2022 has been. A flat-out beating.
That's me on the left.
When you talk about the averages or expected returns, it sounds so comfortable. "Oh, I can make 8%-10% per year?... Great, sign me up." But "average" almost never happens. Ups and downs, ups and downs, ups and downs. Every asset class does this at different speeds, at different times, and for different and unpredictable reasons. And it's uncomfortable.
Right now all things are down except commodities. But what's especially getting killed right now is very long-term assets, which disproportionately benefitted from lower interest rates & the first year of COVID. Long-term US Treasuries are 30% off their all-time highs, and down almost 20% already this year! I don't know if that's ever happened before! And that's only 4 months! The Russell 2000 Growth (SmallCap Growth) is off 33% from it's highs. Kathy Wood's famous Ark Innovation fund is off 70%! If it wasn't for Tesla holding up relatively well, she'd be down 80%!
Do you remember hearing about how great Kathy Wood was during the meme stock GameStop bullshit in January of 2021?!? That was the peak for the new amateur investors, who always flock to unprofitable/innovative "Growth" stocks. ARKK is the perfect proxy for what new retail investors were piling into, and the pandemic made many of those kinds of stocks thrive as the "stay at home" trade dominated. She's going to end up being right about a lot of things, but these are looooong-term bets, and the market is not being kind to them right now. The absolute peak for these kind of stocks was February 9th-12th of 2021, which is more than a year ago.
That was peak of today's version of the Dot Com bubble. 20-some years ago people were literally quitting their jobs because they thought they could make a better living day-trading and sitting on Yahoo Finance message boards. Oops.
Ridiculous? Absolutely. But no different than the "Reddit Rebellion"... just a more evolved message board this time around. It was just a cycle back then, and it's just a cycle now.
Back in 2000, the Nasdaq 100 (which had turned into a ton of the unprofitable "dot com" stocks back then) fell more than 80% over 2 1/2 years, but the first 70% fall happened over the first 12 1/2 months and looked like this:
During the Dot Com crash, lots of companies ending in "dot com" went bust. Amazon.com even got caught up in the carnage & fell 94%. Now look who the biggest companies are... Apple, Microsoft, Google, Amazon, Tesla, NVIDIA, Facebook. In fact Google, Tesla, and Facebook weren't even public companies 20 years ago.
Here is a 3 1/2-year chart of what the Nasdaq 100 did in the years building up to the "dot com bubble", and then the first 12 1/2 month selloff that followed:
Can you see the similarities? There's no magic in finding 2 charts that look similar, but it can sometimes give you a better understanding of why sometimes cycles rhyme with others.
COVID came, they intentionally shut down the global economy, stocks crashed. The Fed stepped in to provide support to avoid a deflationary event, lowering interest rates & buying bonds. Sports got shut down, gamblers piled into the stock market to get their fix. Tens of millions of new brokerage accounts were opened at RobinHood, Schwab, & Fidelity. The "stay at home trade" was on. The riskiest risk takers looked smart, and they speak loudly about it & gained attention.
Now that pendulum has swung back the other way. Inflation and the "reopening trade" is on. The Fed is backing off and raising interest rates to slow inflation. Sports are all back. Folks are back to work. Everyone wants to take that vacation that they had delayed. Everyone is trying to get their supply chains caught up to demand. Low Volatility risk takers look smart, and no one wants to hear about it.
In the big picture, the companies that it appeared will benefit from the "stay at home trade" will indeed benefit from COVID in the end. But right now they are giving back some of the value they had at their all-time highs. They experienced a pull-forward in demand for their products & services & stocks. For many of them, their products & services are still in the upward trend & COVID will have accelerated that trend, but they are kind of in this temporary air pocket from where they pulled demand forward. Now they are dealing with difficult year-over-year comparisons to their year ago thrust of growth. Some of them will have overinvested during this period based upon their temporary surge in demand, and they'll probably need to go bankrupt or more likely be acquired by one of the big boys.
Peloton Interactive went up 482% from 01/01/2020 through 01/13/2021, and has dropped 90% since then. Stay-at-home fitness. The 28-month total return is -38%.
Zoom Media went up 735% from 01/01/2020 through 10/19/2020, and has dropped 83% since then. Work from home. The 28-month total return is +46%.
Teladoc Health went up 252% from 01/01/2020 through 02/08/2021, and has dropped 89% since then. Stay-at-home health care. The 28-month total return is -60%.
Zillow went up 335% from 01/01/2020 through 02/16/2021, and has dropped 80% since then. Stay-at-home real estate. The 28-month total return is -13%.
Chegg went up 200% from 01/01/2020 through 02/12/2021, and has dropped 78% since then. School from home. The 28-month total return is -35%.
Square (now "Block") went up 342% from 01/01/2020 through 02/19/2021, and has dropped 64% since then. Digital payments. The 28-month total return is +59%.
Carvana went up 300% from 01/01/2020 through 08/10/2021, and has dropped 84% since then. Stay-at-home car shopping. The 28-month total return is -37%.
Shopify went up 325% from 01/01/2020 through 11/19/2021, and has dropped 75% since then. Stay-at-home shopping. The 28-month total return is +7%.
Meanwhile, Kathy Wood's ARKK fund (which includes many of the above names) went up 223% from 01/01/2020 through 02/12/2021, and has dropped 70% since then. The 28-month total return is -2%.
To give a little context to those rapid rise & fall examples, the Nasdaq 100 "only" went up 92% from 01/01/2020 through 12/27/2021, and has dropped 22% since then. The 28-month total return is +49%.
The S&P 500 only went up 53% from 01/01/2020 through 12/27/2021, and has dropped 13% since then. The 28-month total return is +33%.
The people who end up getting hurt are the ones who chase whatever is hot recently, trying to "get rich quick". They heard that "it worked" for someone else, so why not give it a shot? Supposedly Jeff Bezos once said to Warren Buffett, "Your investing style is so simple. Why doesn't everyone just copy you?". Buffett replied, "Because nobody wants to get rich slowly."
Risk & Reward are attached at the hip, and a whole new generation of investors are paying their tuition right now to learn this valuable lesson.
If you have a diversified portfolio, there's nothing to panic about. This is just a part of this cycle. Things will be back to "normal" soon enough.
Now go drop some knowledge on a friend. I'm out.