John Rekenthaler, VP of Research at Morningstar, notes that there are three major declines that have already presaged a 2000-like crash:
- Speculators (e.g. Cathie Wood's ARKK).
- Small-growth stocks.
- Large-growth stocks.
As Rekenthaler notes in his recent piece "The Stock Market's Dominoes Are Falling", published in the Rekenthaler Report at Morningstar Investment Research:
On Jan. 5 of this year, my former Morningstar colleague John Coumarianos published a highly prescient article. Noting that that the small-growth indexes were drooping, with the most aggressive of such indexes performing the worst, John wondered whether such behavior was the proverbial canary in the coal mine. The last time small-growth companies so badly trailed other stocks, he points out, was early 2000. Shortly thereafter, blue-chip growth stocks also turned belly-up.
As they have since done.
By other metrics there's a certain number I keep coming back to, and it's more generous than Rekenthaler's note that profitability in the aftermath of 2000 eroded by 50%.
Whether we look at the premium to nominal Market-to-GDP, or we look at CAPE Ratio, or we look at the pre pandemic valuations of major companies in the index as an indicator of what mean reversion looks like, I think we're looking at 40% every which way.
Does that mean it will happen? Not necessarily, no. I'm not a prognosticator. But it does mean that if the interest rate hikes in March and beyond do cause companies to revise 2022 forecast once they understand the full impact of Fed actions on cost of capital, we could be looking at a decline that extends well into 2023.
Submitted February 16, 2022 at 12:36AM by th3cr1t1c https://ift.tt/gOdVypP
