Daily Insight: A Most Volatile Year

Daily Insight: A Most Volatile Year

2022 has been a historic year for tech and we haven’t even got past January. The NASDAQ index that tracks technology stocks has been setting the wrong kind of records so far this month. As it sails past correction territory and threatens a bear market, all in the space of four weeks, I’ve collated a few stats to put into context the pain your portfolio might be feeling:
 

  • 42% of NASDAQ stocks are down 50% or more from their 52-week highs. This figure has only been higher three times since 1999: the Dot-Com Bubble, the Great Financial Crisis, and the Covid Crash. 

  • For the week ending January 21, the NASDAQ traded down greater than 1% every day of the week. Something it hasn’t done since the Dot-Com Bubble.*

  • Bank of America Corp.’s latest survey of global fund managers, net allocation to the technology sector fell to the lowest level since 2008.

  • Last Thursday, the NASDAQ made a historical reversal in which it was up 2% intraday, and finished down 1.3%. This is only the seventh time in the last 10 years the index has turned a 1.5% gain or more into a 1% loss.

  • On Monday, the NASDAQ was down more than 4.5% intraday, and finished the day positive. This hasn’t happened since November 2008. 

*The markets were closed on Monday, making it a 4-day trading week. 

While we may not have a fancy name for it yet, this downturn is approaching historic levels. The last two points indicate just how volatile the markets have been. Our top stock — Shopify — is a shining example of this. On Monday, it went on a 21% journey from trough to peak. Roughly $25 billion dollars of value was created in the space of about an hour and a half between 12 and 2 pm. Even ETFs aren’t safe, with ARK Invest’s Innovation fund ARKK falling 10% on Monday before closing the day up 2.8%. Volatile may be an understatement. 

Let’s look back to times when we had similar levels of volatility. Since the start of the millennium, the stock market has been rocked by some large events that have sent it tumbling. Whether it was the avarice that laid the foundations for The Dot-Com Bubble and The Great Financial Crisis, or black swan events like a global pandemic or 9/11. Is today’s market at these levels? Does it deserve its own moniker? 

Of course, tech’s run since the Covid Crash led to a number of questionable valuations, but pets.com they ain’t. So why are we seeing comparable levels of volatility? Starting with macroeconomic factors, you don’t have to look far. The perennial bogeyman of inflation has reared its ugly head for the first time in a while which has certainly spooked investors. Geopolitical tensions are also contributing to the fear index. And last but certainly not least, the Federal Reserve has stated its intention to taper the economic stimulus it has been providing the market through its purchasing of bonds and low interest rates. 

There is also the fact that tech stocks have been on a decade-long tear that — bar a pandemic-fueled crash that quickly turned itself around — has seen very few roadblocks in that time. Of course, this run didn’t appear out of thin air. It is down to the emergence of cloud computing, Big Tech, fintech, social media, and more innovation than you can shake a stick at, but there have still been harbingers of doom screaming for a Dot-Com Bubble-esque crash since about 2012. 

That leaves us with a market long overdue a pull-back facing a perfect storm of macro-economic factors that are ready to give it one. 

So what happens next? 

Will the bleeding stop, or will we continue to spiral? If I knew the answer to that question I’d be doing a lot more than writing this article right now. Judging by today’s early performance, the rollercoaster ride looks set to continue with the tech index up over 2% at time of writing. 

It’s never fun watching your portfolio go down, nor does it get easier over time. The most experienced investors are feeling the heat right now, just the same as the newbies. However, hopefully today’s piece gave you some context of why it’s happening, and that for the most part, it is not company-specific factors that are causing great businesses like Shopify, Upstart, and MercadoLibre to start the year 20% or more down.

We can’t control the volatility, but we can control how we react to it. It’s during these times that it’s great to have a pre-established investing strategy to fall back on. Whether it’s dollar-cost averaging, in which you invest the same amount at pre-arranged intervals (usually once a month), or keeping a portion of your portfolio in cash to take advantage of perceived bargains. Whatever can give you peace of mind in the face of a sea of red will go a long way to making you a better investor. 

MikeMike

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