Technology favorites from the past decade were hammered in 2022. FANG and related names were the last to fall. Two behemoths finally succumbed to market pressures as Apple and Tesla post significant losses (12% and 37%) in December alone. It is often noted that bear markets eventually get to every company, with the best getting hit last. In August, these two stocks were basically flat on the year. Apple is now down more than the S&P with a 27% loss, and Tesla is even worse, down 65%. Even with the strong relief rally yesterday, Google#, Amazon#, Nvidia, Accenture#, Micron and Qualcomm# are all down ~12% in December as well. On the other hand, Nike#, Boeing#, Meta#, home builders and many healthcare companies are higher for the month.
Many of the most beaten down areas continued to see relentless selling in December. Some of this is driven by tax loss harvesting, some of it fundamental and some just plain old prettying up portfolios. Mutual fund managers are loathe to show massive underperformers in their “Top 10” holdings list which are reported everywhere. Some managers do not want Tesla to be their #1 holding after dropping by 65%, even if they believe in the long-term upside story. This game is as old as the market. The critical part we must follow is what happens in January for these “losers.”
Everyone who wants to sell a stock that is down for tax purposes will do so this month. What an investor should look out for is the response in January. If those names continue to make new lows in January, it will be for long-term, fundamental reasons, not just short-term tax harvesting or portfolio games. So, pay attention to your worst performers into the New Year. Ideally, one gets a January bounce as sellers dry up. Relief rallies can be strong, giving investors a chance to get out of names at higher prices that do not offer upside in this new economy. The rising tide of liquidity that drove growth companies to the stratosphere is not here anymore. Portfolios should be realigned with this reality.
Datatrek Research Interesting Stat:
From their daily update: “The S&P 500 is down 19.9 pct YTD, and just 5 days account for 19.4 percentage points (98 pct) of that decline. Two were CPI report days, 2 were tied to earnings misses, and 1 was right after Chairman Powell said the FOMC was not considering 75bps rate hikes.”
Santa Claus Rally:
Most market enthusiasts look forward to a year-end Santa Claus Rally, which happens in the final week of the year and first two days of the New Year, when stocks, historically, have a greater chance of rising. Year-end bonuses are paid out, profit sharing contributions are made, excess cash is put into markets and many other nuances help drive stocks higher during a light trading week.
Yale Hirsch, creator of the Stock Trader’s Almanac and noted financial expert, has different thoughts on this Santa Claus Rally. He has been quoted as saying “If Santa Claus should fail to call, bears may come to Broad and Wall.” Simply put, if we fail to rally over the course of the final five trading days of 2022 and first two days of 2023, then we are in for another rough year. Market historians should hope for the S&P to be above 3,822 (we closed at 3,849 yesterday).
I showed the S&P 500 chart a few weeks ago, depicting a clear downtrend for the major average. Until overhead resistance is broken, it is safe to say we are still in a bear market where a defensive posture makes sense. The old saw, “there is no use in trying to catch a falling knife”, holds true.
Here are the 3 major averages, with clear trend lines drawn:
Source: Piper Jaffray
Clearly, the Dow Jones is in a much better position than the growthier Nasdaq and S&P 500, which are in definitive downtrends. Until these major averages break out to the upside, the defensive team remains on the field.
Not all stocks are created equal, especially with a macro environment vastly different going forward than the past decade plus. While low interest rates, an overly accommodative Federal Reserve, massive money printing, expanding multiples, globalization and risk-taking dominated the past, we must look ahead. Today, higher interest rates are here to stay (at least for now), money supply has gone negative, and multiples are contracting along with corporate profit margins. Lastly, globalization is in complete retreat. Reshoring is the new trend and likely to stick. Supply chains were upended during Covid. The Russian invasion of Ukraine added pressures to critical inputs from food to energy. Corporations are reluctant to let this happen again, so they are altering their networks. From medical supplies to food sources, to production of everything, there is a major change coming.
One of the most important shifts is also getting plenty of support from the government, with billions of dollars going towards bringing semiconductor manufacturing (along with other areas) back to the United States. Below we can see just how much greater this area will become and we are only one year into the excess funding which has gone from $10 billion in new construction to $45 billion in short order for computer/electronic and electrical products. Expect this to continue and numerous companies will benefit.
We can apply this thinking to several areas of the market going forward. Secular changes are powerful and opportune times to make sound investment choices, especially towards the tail end of a bear market where valuations are lowered. Going forward, we should expect other trends to keep working: a shift to clean energy, artificial intelligence expansion, defense spending expanding on a global scale, a continued shift to the cloud, but at a decelerating pace, technological innovation in medical sciences and the dwindling use of physical cash. Each of these secular trends is ongoing, regardless of interest rates. Identifying future leaders in these areas is time well spent!
Super star athletes LeBron James and Tiger Woods turn 38 and 47 respectively today. Less than a star athlete, Carson Wentz turns 30. Boxer Laila Ali is now 45. Matt Lauer is 65. Lastly, Tracey Ullman turns 63 today.
James Vogt, 610-260-2214