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The fourth quarter begins, and here’s what the 2022 bear market has taught us


Traders work on the floor of the New York Stock Exchange (NYSE) in New York, August 29, 2022.

Brendan McDermid | Reuters

Am I getting sad that 2022 is ending soon and we are embarking on the unknowns of 2023? Are you kidding? The market is more capricious than my dogs in the event of a storm and less pleasant than my husband when I want to “take back” a word from Scrabble.

I will not regret the start of 2022 in any way, even if we have a decent rally in the fourth quarter.

This brings us to a central point: was there anything other than the well-documented and lamented spike in inflation due to stimulus and demand fueled by zero interest rates that precipitated the bear market we endured? This year ?

I like to call it “Covid Revenge”, and I’m not talking about a Paxlovid rebound. When the market started to take the virus seriously — even though most governments hadn’t — on Valentine’s Day 2020, investors sparked a flood of selling that sent the S&P 500 down by 32% in five weeks.

At this level of around 2,305 S&P – just a week after most cities, states and countries around the world closed their schools, courtrooms, offices, restaurants, shops, arenas and airports, but before we have clue to the human toll of Covid being – the market quickly began to reverse course and climb.

A steady climb, then a descent to Earth

With only minor interruptions, the S&P has climbed steadily for 21 months. The index has doubled since its low in March 2020 and it is up 40% from its previous high in February 2020. That the market was propelled by unbridled optimism about potential vaccines, convinced that the shutdowns could not last only a while or unfazed by the economic damage caused by the pandemic, he moved forward with remarkable determination.

This trend has continued unabated through shutdowns, reopenings, vaccine development and approvals, stimulus checks galore, and 1 million Covid deaths in the United States. The halo remained in place until the very end of 2021. S&P ended its run at 4,766, more than double the 2,305 threshold in March 2020.

The market is not used to giving something for nothing, however, and the 100% gain could have been conditional on unattainable factors. None of the politicians had experience with pandemics. This meant that the likelihood of them successfully designing and executing the right-sized stimulus and bailout packages for citizens, businesses and institutions, as well as shrewd management of monetary strategy, was extremely low.

If the market expected continued growth – or at worst, a soft landing – the huge infusion of cash into people’s pockets, combined with Covid-ravaged supply chains, was destined to push prices towards the moon. This inflation triggered aftershocks of the earthquake. Unfortunately, these assumptions were too rosy for the market. Covid Revenge has brought stock prices back to Earth.

A potential washout in sight

In the week ending September 21, across NYSE listings of stocks with market caps above $3 billion, there were 386 stocks down more than 40% from their 52-week high. Some 220 stocks fell more than 50% and 122 fell more than 60%.

The ARK Innovation ETF, the best-known gathering of super-growth tech companies in the hottest industries of software, cloud computing and more, is down about 70% from its 2021 high. It’s revenge on the once naïve cohort of Covid-stricken investors who poured money they weren’t spending on travel and restaurants into funds and stocks on their favorite trading platform. The market has taught them what happens when you fail to consider the possibility of interest rates rising above zero, causing the value of an earned dollar to implode many years into the future.

Pain runs deep in global markets and seeps into global economies. At its peak, the S&P was up 41% from pre-Covid highs. Now we are about 6% above that September 30 level of 3,380. How’s that for revenge?

Now we need to find the bottom. There may be signs that the switchblade is getting dull. Some of the worst performing names on the S&P over the past year and a half, such as PayPal and Netflix, have washed out so much that they have outperformed the market in recent months.

The S&P 500 price-to-earnings multiple, which was 21.5 times the next 12-month estimate at the start of this year, is now 16 times the 2023 estimate, assuming near zero growth. With a drop so palpable we can hear it jumping from every screen, we need to be in sight of a level that won’t exact vengeance on those intrepid shoppers.

Karen Firestone is President, CEO and Co-Founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.

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