The S&P 500 is down 12% year to date with over half of those losses coming in the past month. Yet, it’s holding up better than other areas of the market.
In fact, less than half of the S&P 500 stocks are down 20% or more from their 52-week high.
That’s tame compared to the rest of the market. About 33% of all stocks are down 50% or more from their 52-week high. For the record, less than 2% of S&P 500 stocks are down that low.
The disconnect is between the S&P 500 and Nasdaq stocks, especially tech and healthcare.
I covered this a few months ago. Money poured into both sectors, over-inflating the stock prices of the “pandemic winners.” Over the past year, the market corrected that mistake but the bleeding hasn’t stopped.
It’s been ruthless in some cases. Almost 20% of all stocks are down 70% or more from their 52-week high.
About 10% of all stocks are down 80% or more from their 52-week high.
Almost 4% of all stocks are down 90% or more from their 52-week high.
The losses are huge. Yet, what’s happened so far pales in comparison to what we’ve seen over the past two decades. All the charts above show that it’s nowhere close to what was experienced in the Dotcom crash, the Financial Crisis, or even March 2020.
Arguably, the market is hitting the worst offenders because they deserve it. For instance, over 40% of all stocks had no earnings over the last 12 months.
But what we haven’t seen in at least 20 years is such a high number of stocks with no sales. 15% of all stocks reported no revenues over the last year! That’s a smidge over 900 stocks with no sales!
Of those, 52 are currently valued at $1 billion or more! Why so many? Here’s a hint: SPACs. There are others, of course, like biotech and a few EV companies hoping that their research produces a viable product. But many are SPACs that raised money in the hopes of finding a company to acquire.
What does this rout mean? For the past two years, at least, investors were willing to buy hope. The excitement of quick short-term profits helped.
Investors get excited from time to time over companies with great stories. Sometimes those companies have the growth to back it up. Other times the fundamentals are questionable. But if enough people get caught up in it, it can hit a point where the story ceases to be about the company and becomes solely about the rising stock price. Speculation runs wild. The higher stock prices rise, the more they disconnect from reality, and the more likely it comes to a crashing end. That’s what’s happening now.
But just because a stock’s price fell 50% doesn’t mean its decline is over. The old quote about the stock that fell 90% is as much a joke as it is a warning. It was a stock down 80% that then got cut in half.
Speculative excess in one direction leads to excessive fear in the other. Prices rarely stop falling at a company’s true value. They keep falling until there are no more panicky investors left to sell.
That said, while many stocks deserved their fall from grace, there is a price point where those same stocks become too cheap. Patient investors with a process for valuing businesses can often find great deals in the carnage.
But if you’re buying a stock down 50% or more, you better be comfortable with the possibility that it gets cut in half again. That’s the risk part of investing. If you’re not thinking it’s possible, then you’ve already lost.
Another option is to sit and watch. A third option is to be happy in a diversified index fund, like the S&P 500, because it avoided much of the speculative excess entirely. Sure, it’s down year to date, and it may get worse, but the companies behind it are legit, proven businesses with a track record of success.
In either case, these periods of massive price corrections tend to be buying opportunities for patient long-term investors.
Last Call
- Homeland Securities – Verdad
- Profiting From Lower Volatility – J. Rekenthaler
- Sell in May and Go Away? – Albert Bridge Capital
- The Biggest Danger of Investing in Bad Businesses – Safal Niveshak
- The Story of Hetty Green: America’s First Value Investor and Financial Grandmaster – M. Higgins
- When to Listen to Markets? Druckenmiller, Diversity, and the Debate over 1987 – Insecurity Analysis
- Investing in Innovation – Sparkline Capital
- Making Concessions: A Tale of Capitalism, Control, and Snacks – Pipe Wrench
- Sweet and Squishy as Ever, the Gummy Universe Keeps Expanding – New York Times
