3/7/21
S&P 500: 3848
Nasdaq: 12641
10 Year Treasury: 1.5%
David R. Snyder, CFA
In the late 1960’s there was a technology bubble and the fastest growing companies were known as “Go Go” stocks. From November of 1962 through November 1968 technology stocks (categorized under business equipment sector as there was no official tech sector) compounded over 24% per year vs. 15% per year for the S&P 500. Smaller cap tech stocks did even better. Sound familiar? Star money managers such as Gerald Tsai, Jr. and Frank Carr led their respective mutual funds, the Manhatten fund and the Enterprise fund, to annual gains as high as 120%. Sound familiar?
The stock boom of the late 1960’s brought in millions of new younger investors. Sound familiar? Speculative tech stocks were the mania. Sound familiar? Many invested in stocks for the first time and it didn’t end well.
From January 1969 through June 1970, technology stocks declined 39% vs. 29% for the S&P 500. Tsai’s and Carr’s funds fared much worse. Only the technology stocks that became part of the Nifty Fifty recovered from 1970 to 1973, while the rest of tech continued to underperfrom until the late 1970’s. The tech stocks in the Nifty Fifty never really recovered after their peak in 1973.
The speculative tech bubble of 2020-21 has officially burst. The recent crash in speculative tech stocks is not a garden variety correction. There has been massive technical damage and most of these stocks will nor revisit their highs for years and maybe never for some overhyped tech stocks. As I predicted the slide has happened very quickly, not giving investors time to sell. There are literally hundreds of speculative stocks that have declined 40% or more from their highs with the S&P 500 sitting just below its all time high.
Soon enough these speculative stocks will rally and the new investors thinking it is a great buying opportunity will be lured in to buying. But a series of lower highs and lower lows will just increase their losses. Don’t see any chance for a real bottom until at least the early Fall and maybe years for some overhyped stocks. Yes there will be exceptions but buyer beware.
I have been warning investors about these overhyped stocks for the last few months. Close to their highs I warned in my writings of coming crashes among others in Zoom Video (ZM 337), down 39% from its high, Jumia Technologies (JUMIA 43), 37% off its high, Quantumscape (QS 44), 67% decline from high, Chamath Palihapitiya’s Clover Health (CL0V 8), 49% drop from high, and JinkoSolar (JKS 42), 55% from high. I also warned back in September that Apple’s (AAPL 122) valuation was completely out of whack even among the FANG world and its stock is lower today as the overall stock market has soared.
As I have been recommending since last summer, small caps and value have significantly outperformed. Year to date the Russell 2000 Value index (IWN) has increased 19.2% vs. the Russell 1000 large cap growth index (RSG) -1.8% return. That 21% difference has reversed only about half of the outperformance of large cap growth over small cap value in 2020. And since 9/24/20, small cap value has increased 67% vs. 21% for large cap growth. I always preach reversion to mean for asset classes, and once again it is working its magic. This trade is not over and may last a few years.
The stock market correction is really not a correction but just a rotation of sectors from hypergrowth to value. Just so happens that there are more large cap growth stocks in the S&P 500 on a market capitalization basis, thus the modest decline in the overall index. This will continue, albeit at a slower pace for the remainder of the year. The overhyped speculative stocks along with good quality hypergrowth stocks are due for a bounce soon, but it won’t last.
One of the major problems with SPACS, which represent a majority of IPO’s this year, is that they are permitted to project sales and earnings in to the future, unlike conventional IPO’s. This has allowed SPAC sponsors and their target companies to hype their projections and entice retail investors who don’t know better to buy their stocks. After the conclusion of the SPAC crash, the SEC will surely issue regulations on SPACS to protect investors.
Investors are still playing games in Gamestop (GME 137), among others. But many of these Reddit stocks are fading now after the first day, leaving investors who got in late with big losses. It was very disappointing to see the CEO of Chewy’s (CHWY 82) who owns a big stake in GME, egg on Reddit investors with his provocative tweets concerning GME. He knows better than to play that game. He showed no integrity for the financial markets with his shenanigans. Was happy to see his CHWY stock decline 25% last week. Karma.
When CHWY was $5 or $10, I actually thought it had some turnaround appeal. But I wanted to at least see a different game plan (no pun intended) before I invested. But once it rose above $20 with no change in operations it became pure speculation. And yes Josh Brown of Ritholz management, GME does matter. It may be only a $5 billion dollar company but it is the principles or lack therof behind the stock runup that matter. Also no company is going to buy them for $5 billion if it is worth only $500 million. This is so even if the buyer is a $100 billion company. Companies just don’t throw money away.
Also Josh it does matter that small cap value is outperforming large cap growth. At the beginning of the year you stated that everything is going up and don’t need to distinguish between sectors. Really? Didn’t hear that much last summer when growth was outperforming. A 21% spread between large cap growth and small cap value in two months this year is meaningful. Most individual investors are still stuck in growth stocks. It is not easy to predict which sectors will outperform but when there are extremes as we had last year it is doable. After all I was able to discern the coming change.
Also your long held view that valuations don’t matter is just plain wrong. They might not matter sometimes in the short term but they always matter in the intermediate and long term. And they matter in the short term when there are extremes as we had the last six months. Your explanation that growth stocks are just going down because of profit taking, positioning or change of sentiment misses the point. These changes occur when valuations are out of whack or at extremes along with predictable catalysts, which are higher interest rates and a booming economy
Also Josh your criticism of noted investment strategist Jeremy Grantham is unwarranted. Jeremy didn’t say in 2015-16 that there was a bubble in stocks that would burst. He stated in late 2015 that the oil price crash that was causing the stock market to sell off was not the end of the bull market and that there would be one more substantial move higher after that correction which was the correct call. He was not calling for the bubble to burst in 2016. Jeremy has been too conservative with his stock forecasts these last 10 years, but he is excellent at calling bubbles even if he is a year or two early. He has never called a bubble that did not burst within two years and he made the call last summer with the S&P 500 at 2900 that we are in a stock bubble and that it would burst. Thus to keep his perfect record the S&P 500 has to drop well below 2900 sometime in the next 18 months. Never been wise to bet against him in the past.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.