Why It’s Not Vanilla Dip

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Despite Friday’s mini-rally, it’s getting ugly like my former TSTIME colleague Jack Cafferty used to say. You’ve seen the numbers and they’re not pretty: the worst start to a year for stocks since 1939. Big tech companies have lost trillions of dollars in market value. Looking at your wallet is like a kick in the stomach.

The carnage is not evenly distributed, however. While the Dow Jones (^DJI) is down 11% year-to-date (the market peaked on January 3 – ideally the first trading day of the year), the NASDAQ (^IXIC), very technological, is on an overwhelming 25. %.

As if that weren’t enough, stay-at-home and meme stocks, SPACS and oh my lord, crypto are worse. Examples: Peloton (PTON) was down 60% at one point, SPACS is down 43% on average, and Bitcoin is down around 55% from its November peak.) This means that there is a certain method to madness.

Risky bets are pounded the most.

How many of us have bought these sparkly things, only to get burned? Conversely, how many of us rushed to buy Dow Chevron, Honeywell or P&G components? The former is up 43% year-to-date (Warren Buffett picked up some), and while HON and PG are down year-to-date, it’s only in the single digits. But no, you had to fly high. And now we’re falling hard.

A cut-out photo of Berkshire Hathaway CEO Warren Buffett greets investors and guests as they buy deals at Berkshire Hathaway Inc’s first in-person annual meeting since 2019 in Omaha, Nebraska, U.S., 29 April 2022. REUTERS/Scott Morgan

Speaking of Buffett, I have to laugh at how classic this turn of events has been for him and Berkshire shareholders. As I recently noted, as with countless past bubbles and fads, Berkshire has followed the market, leading another generation of naysayers to insist that Buffett has lost his investing touch. Not!

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A new environment favors a different group of actions

A quick recap of why the market is taking it on the chin: the lingering COVID pandemic, Putin’s invasion of Ukraine, and the rise of nationalism and decline of globalism, which are torturing supply chains and drive up inflation. Meanwhile, the Fed is raising rates and shrinking its portfolio to prevent the economy from overheating.

I’m not saying this is all going to be bad for the stock market forever, but at the very least this new environment will favor a different group of stocks, like oil and gas producers and companies that produce and sell to United States. , for example. An emblematic signal from this week: Saudi Aramco has overtaken Apple as the most valuable company in the world.

“As the Fed raises rates, there has been a lot of concern, even if the base case is not a recession in 2022, what does it look like beyond that, in 2023 and beyond? beyond,” asks Sonali Pier, managing director and portfolio manager of PIMCO. . “And that’s really why we’re seeing some investors moving from cyclicals to non-cyclicals, and really worrying about companies where they have low-margin businesses, and that’s going to struggle to be squeezed by inflation. And as a result , you can see that there has been a preference for defensive names.

“We’ve been over-risked for most of 2020 and 2021,” Tracie McMillion, head of global asset allocation strategy for Wells Fargo, told Yahoo Finance. “And we have reduced our risk so far this year. We are becoming more conservative within equities in terms of asset class allocation and geography. We are leaning towards the US We are leaning towards large and medium capitalizations and we are moving away from small ones.

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Russian President Vladimir Putin chairs a meeting with officials on fighting forest fires, via video link in Moscow, Russia May 10, 2022. Sputnik/Mikhail Metzel/Pool via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD.

Russian President Vladimir Putin chairs a meeting with officials on fighting forest fires, via video link in Moscow, Russia May 10, 2022. Sputnik/Mikhail Metzel/Pool via REUTERS ATTENTION EDITORS – THIS IMAGE WAS PROVIDED BY A THIRD.

Going back to Putin for a second, it makes sense to take risks, as they say on Wall Street, and hide when you have an unhinged autocrat with nukes alluding to WWIII. Who wants to be giddy with growth stocks given this?

Are we headed for a recession?

I understand this thing could be around a dime and maybe Friday was the start of that. But let’s say no. Will this market collapse and surge in inflation cause a recession? Not necessarily. All sorts of unfortunate events like stock market slumps and rising prices, as well as oil price shocks and, as we have seen, pandemics can cause recessions. But it is not inevitable. For example, neither the flash crash of 2010, nor the bear market of August 2011, nor the selloff of August 2015, nor the 19.73% fall in the market in the fall of 2018 precipitated a recession.

The closest corollary to our recent dilemma might be the bursting of the tech bubble of 2000 and the ensuing recession from March 2001 to November 2001. And of course, this recession was exacerbated by the September 11 attacks.

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But we probably have even more serious exogenous factors this time around (COVID, Putin, supply chain issues and inflation.) All of that, plus a losing market, is more than enough to cause the economy to contract. world.

Anyway, it is likely that we will see accounts in this unfortunate season. Cathie Wood’s Ark Innovation ETF rebounded strongly on Friday but is still down 54% this year and recently lost more than 75% from its February 2021 high. and lately it was grabbing depressed Coinbase (COIN) stock.

Then there’s Tiger Global, which has reportedly suffered losses of $17 billion since the start of the year, erasing around two-thirds of its gains since its launch in 2001. According to the FT, other funds, like Coatue Management, run by the so-called Tiger Cubs (fund managers who once worked for Julian Robertson’s Tiger Management) would also be beaten as they dumped house-to-house names like Peloton and Zoom (ZM).

And from Silicon Valley, Crunchbase reports that prominent VC Andreessen Horowitz’s big flying IPOs aren’t so much anymore:

“Of the 17 companies in Andreessen’s portfolio that have gone public at initial valuations of $1 billion or more in the past 18 months or so, all but one are trading below their offer price. And even the only outlier — Airbnb — is down from its day one closing price,” Crunchbase noted.

Bottom line: The market can rebound at any time, but that doesn’t sound like a simple vanilla dip to me.

This article was featured in a Saturday edition of the Morning Brief on May 14, 2022. Get the Morning Brief delivered straight to your inbox Monday through Friday by 6:30 a.m. ET. Subscribe

By Andy Serwer, Editor of Yahoo Finance. Follow him on Twitter: @server

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