It was quite an interesting first week of the year. The S&P was down 1.87%, the Dow was down .29%, and the Nasdaq was down a whopping 4.53%. That really doesn’t tell the whole story of what is going on though. Roughly 40% of stocks trading on the Nasdaq are now down 50% from their 52-week highs. Only 13% of days since 1999 have seen more stocks cut in half. For those investing in the most expensive names in the market, this selloff is worse than March of 2020, which is unbelievable to think of. On the positive side, value stocks are absolutely on fire. Higher interest rates are good news for financials, and commodity stocks tend to do best in an inflationary environment. Since these were the two cheapest areas of the market, they have plenty of room to run.
Over the last year especially, I’ve written a ton about the similarities between now and 2000, which was the only time valuations were higher than now by just a little bit. This is a bubble of epic proportions in many asset classes, which is why value stocks are so unbelievably attractive. Not only should we not lose money, we should make a lot, which is the same phenomenon that occurred for value when the Nasdaq declined by 80% in 2000-2003. There are two images at the top of this email. The first is the options trade I mentioned yesterday, which highlights how attractive these tools are in more challenging market environments. The second is a chart that shows the performance of Regional Banks vs. the 2020 glamour fund Ark. As you can see, after ARK getting off to a torrid lead and the banks struggling, the banks have now caught up. It’s like the tortoise and the hair story in some ways. But the thing is, the ARK stocks are not cheap now, not even close, while banks still have considerable upside potential and dividends. This is not a small bubble, it is a massive one. Think of all the people that chased that performance of ARK and now got crushed without participating in much of the upside. This is why greed works against us in the financial markets. You want to maintain a business-like approach to investing and you don’t want to get caught up in chasing stuff just because your neighbors are bragging about making money off of it at a cocktail party.
The indices have held reasonably steady based on those giant stocks that dominate it such as Apple, Tesla, Amazon, Google, etc. If they start going down, it could drive massive margin calls for market participants, opening up phenomenal opportunities for us potentially. I know I’ve written more than usual this week, but I wanted to really make clear that we have an exceptional opportunity to take advantage of some opportunities. If you have excess cash that you’d like to get invested, please don’t hesitate to let us know as this heightened volatility is exactly what we’ve been waiting for.