Am I becoming rueful that 2022 will end soon, and we will embark on the unknowns of 2023? Are you joking? The market is more skittish than my dogs in a thunderstorm and less agreeable than my husband when I want to “take back” a word in Scrabble.
Under no condition will I regret the departure of 2022, 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 surging inflation from the stimulus and zero-interest rate-fueled demand that precipitated the bear market we’ve endured this year?
I like to call it “Covid Revenge,” and I don’t mean a Paxlovid rebound. When the market began to take the virus seriously — even though most governments hadn’t — on Valentine’s Day 2020, investors unleashed a flood of selling that sent the S&P 500 down 32% in five weeks.
At that roughly 2,305 S&P level — merely one week after most cities, states, and countries around the world shut their schools, courtrooms, offices, restaurants, stores, arenas and airports, but before we had any idea what the human toll of Covid would be — the market soon began to reverse course and climb.
A steady climb, then a descent back to Earth
With only minor interruptions, the S&P climbed steadily for 21 months. The index doubled from its March 2020 trough, and it advanced 40% from its prior high in February 2020. Whether the market was propelled by unbridled optimism about potential vaccines, convinced that shutdowns could only last so long or unfazed by the economic damage caused by the pandemic, it moved upward with remarkable determination.
This trend persisted unabated through shutdowns, reopening, vaccine development and approvals, stimulus checks galore and 1 million Covid deaths across the U.S. The halo remained in place until the very end of 2021. At that point, exhausted from traipsing uphill for so long, the S&P ended its run at 4,766, more than double the 2,305 threshold in March 2020.
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The market is not, however, in the habit of giving something for nothing, and the 100% gain might have been conditional on factors that were impossible to achieve. There were no policymakers with any experience in pandemics. That meant the likelihood that they would successfully design and execute the right-sized stimulus and bailout plans for citizens, companies and institutions, plus astutely manage the monetary strategy, was extremely low.
If the market expected continued growth – or at worst, a soft landing – the tremendous infusion of cash in people’s pockets, combined with the Covid-ravaged supply chains, were destined to push prices to the moon. That inflation has triggered earthquake aftershocks. Unfortunately, those assumptions were too rosy for the market. Covid Revenge pulled stock prices back to Earth.
A potential washout in sight
On the week ending Sept. 21, across the NYSE listings of stocks with market capitalizations above $3 billion, there were 386 stocks down over 40% from their 52-week high. Some 220 stocks fell over 50%, and 122 dropped more than 60%.
The ARK Innovation ETF, the best-known gathering of ultra-high growth technology companies in the hottest sectors of software, cloud computing and more, has lost about 70% from its peak in 2021. That’s revenge on the once-naïve cohort of Covid-minted investors who poured money they weren’t spending on trips and restaurants into funds and stocks on their favorite trading platform. The market taught them what happens when you fail to contemplate the possibility that interest rates will rise above zero, imploding the value of a dollar earned many years in the future.
The pain is deeply entrenched across global markets and is seeping into world economies. At its peak, the S&P was up 41% from the pre-Covid highs. Now, we are about 6% above that 3,380 level as of Sept. 30. How’s that for revenge?
Now, we need to find the bottom. There may be some signs that the switchblade is getting dull. Some of the worst performing names in the S&P over the last year and a half, such as PayPal and Netflix, became so washed out that they have outperformed the market in recent months.
The price-to-earnings multiple of the S&P 500, which was 21.5 times the next twelve months’ estimates at the beginning of this year, is now 16 times 2023 estimates, assuming almost no growth. With bearishness so palpable we can hear it jump off every screen, we must be within sight of a level that will not elicit revenge on those intrepid buyers.
Karen Firestone is chairperson, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.