Galeanu Mihai
Property bid up by irrational quantities finally find yourself on clearance sale. At all times. That is one thing to recollect with the seven costliest tech firms ending 2023 at their October 2021 value peaks (chart proven beneath, courtesy of All Star Charts), even whereas the Fed funds price has moved from .25 to five.5% and earnings estimates are falling. Positive, this handful of inventory all-stars have spent two years going nowhere with tons of volatility, however who cares?
Permabulls are emboldened. The CNN Worry and Greed sentiment index is again within the excessive greed zone. Classes discovered: Zero.
Making up a document 31% of the S&P 500 and 45% of the Nasdaq market capitalizations, the ten costliest tech firms attracted trend-following flows into the bloated S&P 500-a CAPE above 30x in December-by the very best greenback quantity on document (chart beneath since 1999, courtesy of The Every day Shot).
Rebounds within the few have masked ongoing value weak point within the majority.
Though many firms borrowed lengthy when rates of interest had been at 5000-year lows throughout 2020-21, the extent of debt issues and 40% of Russell 2000 firms had detrimental earnings in 2023-alarmingly excessive in a non-recession 12 months. The detrimental earnings share was half that quantity heading into the 2001 and 2008 recessions, after which it doubled (see gray bars beneath since 1995, courtesy of Recreation of Trades). Credit score spreads on publicly-traded ‘hi-yield’ debt began 2024 at a complacent 321 foundation factors over similar-dated Treasury bonds-much too low for the capital danger inherent. Previous bear markets haven’t bottomed till high-yield spreads have widened to greater than 7oo foundation factors, with junk bond costs dropping with equities.
Massive-cap firms are sometimes extra financially steady however nonetheless noticed a tripling of the detrimental earnings share throughout previous recessions. The S&P 500 money-losing share at 5% as we speak (in inexperienced beneath) is because of transfer up from cycle lows.
After spiking on hopes for price lower miracles in 2024, the S&P 600 small-cap inventory index (in inexperienced beneath since mid-2021, courtesy of my companion Cory Venable) ended 2023 nonetheless -9% from the October 2021 high. Late cycle tech out-performance within the 2008 high (circled within the inset field beneath) resolved with the S&P 500 following small-cap shares right into a halving.
Usually, January clocks inventory market positive factors following tax-loss promoting in December. However after manic shopping for final month, this 12 months is likely to be totally different. Yesterday’s -1.6% was the worst annual begin for the tech-centric Nasdaq since 2016, and economically delicate small caps, transports, and commodities all adopted decrease.
Disclosure: No positions
Editor’s Word: The abstract bullets for this text had been chosen by Searching for Alpha editors.