Juggling Dynamite

Notwithstanding yesterday’s bear market bounce, the tech-heavy Nasdaq 3000 index opens today-18% from its November 18 peak–a market cap loss of over $5 trillion in the past four months.

Under the averages, the individual carnage is broad and more significant. As highlighted by Robin Wigglesworth for the Financial Times yesterday (see Tech wreck looks more like another dotcom bubble bursting), nearly two-thirds of the Nasdaq’s 3,000 plus members have fallen at least 25%, 43% by more than half, and almost a fifth over 75%– the most since the 2008 financial crisis. Here’s the visual.

So far, the two most expensive Nasdaq companies by market cap, Apple (making up 12% of the top 100) and Microsoft (10%), have softened the index losses with relatively mild declines to date (-13% and -17% as of last night’s close). Adjusted for market cap, about 30% of the Nasdaq is down more than 25% so far, much less than the 80% plus who took that beating in the 2008 bear market (see below). But then, this bear market is only just started.

Since 2019, we noted that stock indices were extra vulnerable because their gains were being driven by a handful of widely adored and over-bought leaders. The top five most expensive companies in the S&P 500 (Apple, Microsoft, Amazon, Alphabet and Facebook) accounted for a whopping 23% of the index in 2021, compared with a peak concentration of 18% (for Microsoft, GE, Cisco, Intel and Wallmart) at the 2000 market top. After weaker companies have been taken out on stretchers, bears come for the most expensive, widely held ones.  Then the selling intensifies.

Repricing of Amazon (-26% as of last night’s close), Alphabet (-11%) and Meta (Facebook -50%) is well underway. At 12% of the Nasdaq 100 and 7% of the S&P 500 market caps, the bullish dreams of index-tracking funds and portfolios are now dependent on Apple more than ever.

As shown below from my partner Cory Venable since 2019, from $158 today (-13% from its $182 high), the next downside tests for Apple are at the $150 and $95 areas (-47% where it topped in January). As extreme leverage and concentration unwind, a 47% decline would be milder than historically typical. A peak to trough loss greater than 60% would be more normal and stock indices will tumble for the ride.  Early dip buyers should be aware.

Super slow on the uptake, but mainstream finally seeing the play here.

General Motors on Tuesday announced a pilot program with Pacific Gas and Electric Co. in California that would make its electric vehicles capable of powering a home in the event of a power outage or grid failure.

“This is really significant because it’s another benefit of owning an electric vehicle,” GM CEO Mary Barra said Tuesday on CNBC’s “Squawk Box.”  Here is a direct video link.

The aging population drove a steady rise in retirees over the past decade.  The pandemic accelerated this with a surge in those opting to retire sooner than previously expected (shown below courtesy of Dailyshot.com).
The motivation has been partly fear and risk around contracting COVID-19 and greater workplace stress amid pandemic protocols.  It was also encouraged by a surge in emergency support from governments and central banks, which boosted household income, savings and speculative fervour, goosing asset prices far beyond historical norms.

The downside is that asset gains are not permanent and, ex-government transfers, real incomes have not recovered their pre-pandemic trend (below courtesy of EPB Macro).

After two years of debt-addition and extreme price inflation in homes and corporate securities (equities and debt), households are now more risk-exposed than at any time in decades, just as the downcycle itself is poised to be larger and longer than average.

As a percentage of U.S. household assets, bonds fell to an all-time low of 2.3% in 2021.  Recent Fidelity data showed that 40% of retirement accounts for 60- to 69-year-olds were 67% in equities at the end of 2021.  In the process, equities, at the highest valuations in decades, became 40% of the entire financial asset mix from a long-term norm of 18%.

It’s not just that individuals hold a record amount of their self-directed savings in equities and equity-based products.  Fund managers’ allocations (shown below since 2005), ETFs and pensions are overweight too.
The capital costs of this are just starting to bite, see U.S. Retirement funds, heavy on stocks, brace for losses:

Volatile stock markets are eroding the retirement savings of America’s teachers and firefighters after public pension systems ended last year with equity holdings at a 10-year high.

Public pension funds had a median 61% of their assets in stocks as of Dec. 31, up from 54% 10 years ago, according to Wilshire Trust Universe Comparison Service. Since then, the Russia-Ukraine War and expectations that the Federal Reserve will raise interest rates this month have battered equity prices, reducing those holdings by billions of dollars.

Unfortunately, value-indiscriminate buying and passive holding on the way up leads to value-indiscriminate liquidation after bubbles burst.  It’s often only then that people realize the lasting ramifications of their losses.  For these reasons, this PBS segment on early retirees is hard to watch.

Among the reasons for the current labor shortage in the U.S. is the exodus of older workers retiring early during the pandemic. Economics correspondent Paul Solman reports. Here is a direct video link.