While the S&P is just now officially entering ‘correction’ territory, dropping more than 10% from a recent high, stocks under the surface have been absolutely pummeled. While you may not keep up with many of these nuances, I find it fascinating to see stocks like Square down almost 70%, Shopify off over 60%, Netflix down 46% or Adobe 37%.
For the last several years the Tech heavy NASDAQ that has led us higher now finds itself off 19% from highs and, interestingly enough, is seeing more stocks hitting 52-week lows than at any time in history, even the bear markets experienced in 2000 and 2008/2009. The reality is that while the S&P is only just now down double digits, we’ve seen an absolute crash of many stocks under the surface. There’s an old adage, stocks take the stairs up and elevator down, and that has certainly been true this year.
Market participants are simply riddled with uncertainty and when the picture is unclear, selling first and asking questions later is the typical response.
At present the market is still trying to grapple with a series of interest rate hikes foreshadowed by the Fed. These rate hikes are in response to the elevated CPI in an attempt to slow down demand and thus curb prices. Unfortunately, the economy isn’t on such stable footing and the Fed runs a great risk of raising rates too quickly, potentially derailing any growth we’ve seen as we begin to reopen the country post-Covid. Energy prices for instance, are moving on geopolitical fears, not low rates, and thus an interest rate hike will likely have very little impact on this area of the CPI. As energy costs remain elevated, the cost of transporting our food across America will also remain elevated, again having little to do with rates.
What I believe the market seems to be sniffing out is the Fed action having very little impact on the CPI and thus resulting in an economic downturn as the consequence of their hawkish actions.
From my vantage point the Fed is in a terrible, no-win position. The longer they hold out and do nothing, anxiously awaiting the CPI to come down, they experience the backlash of other policy makers as well as the general public’s response. On the other hand, acting too quickly could easily derail a fragile economy and may even spark a credit crisis, as governments and corporations alike have become dependent on free and easy money.
On the geopolitical front, we face great uncertainty surrounding Russia’s intentions with Ukraine. It is clear that moving close to 200,000 troops on the border is more than a military exercise, yet almost daily we’re met with conflicting information regarding what might happen next.
I find it odd that average people tend to believe we’re receiving solid intelligence regarding Russia’s intentions. Do we believe that anyone would broadcast the date and time of a pending invasion for the public to propagate over social media?
What I do know is that this back and forth can escalate quickly, and should we see a war breakout in Eastern Ukraine, I suspect we’d see further sanctions, higher gas and oil prices, and other commodities such as Gold remaining a safe haven and in demand.
While the indices are nowhere near the March 2020 pandemic lows, I feel similar pangs of uncertainty wafting in the air. It seems unlikely we’ll resolve any of these issues any time soon and therefore the markets continue to struggle.
At this very moment the market seems incredibly oversold and ripe for a strong bounce. It is doubtful that this bounce becomes a new bull market but rather an opportunity for us to evaluate positions and determine whether or not to raise even further cash. While we’ve already been proactively raising cash, I will not hesitate to raise more should we feel this is the right move.
There are many areas where I’m excited about putting capital to work at lower prices but will remain patient and let the dust settle before acting. While declining markets are never fun, the bright spot is just how many opportunities may arise for those who are prepared and ready to pounce.