This week, according to The Wall Street Journal, 41% of financial assets held by individuals were invested in equities. That is an all-time high. You can attribute it to the rise of small retail investors investing through new platforms like Robin Hood, but an increase of that scope is clearly more broad – based than just a few college kids investing their nest eggs online. At the lows in 2009, the percentage of assets individual investors held in stocks was 18%. The last peak, before the Internet bubble burst in March 2000, was 38%. It was 33% in mid-2007, a few months before stocks collapsed in the fall of that year.
The fact that so many people have found the stock market doesn’t mean a bear market is inevitable. Fundamentals today are strong. Earnings are surging and interest rates are still negative in real terms. But neophyte investors are not ones with long term experience, almost by definition. A few months ago they were chasing SPACs, Bitcoin, hot IPOs, GameStop and almost any new issue. For the past 30+ days, those bets have gone a bit sour. Many formerly hot stocks are now well off their highs. Some are down 30%+. But they still could be double, triple or more than what they sold for a year ago. That goes for names like Tesla, Bitcoin, and Zoom.
Very often, the last ones in are the first ones out. We see that today. Others simply overstayed their welcome. Quick profits that looked good on paper but that weren’t cashed in now sell well below purchase prices in many cases. Profits are now losses. Weak hands are now sellers anxiously trying to limit losses. That is what we saw yesterday, although yesterday was simply an acceleration of what has been going on for days and weeks.
When the biggest of the big names, like Apple#, Amazon# and Alphabet# take a lickin’, it’s only a matter of time before outright fear takes over the minds of the neophytes. For sure, some will hang on. But 20-30% losses can quickly become 50%+ not because the economy is weak or because interest rates are high. They become big because there never was a solid fundamental reason why many of these stocks sold for whatever price they were at during peak times.
Many of these hot names have never made money. Most never will. Yes, they have great promise, and some even have sharply rising revenues. But great ideas don’t make great companies and few become great stocks. Buried in this week’s news is the story that Verizon is selling Yahoo and AOL for a fraction of what it paid. And that was a fraction of what they were valued by the stock market 20 years ago. Yahoo and AOL were among the superstars of their generation. Only Amazon became a true home run. Most of the other pretenders went broke. There is no reason not to expect that to happen again. Every biotech lab experiment isn’t going to be the next multibillion dollar wonder drug. Few, if any, of today’s new electric car startups are going to be the next Tesla.
As I noted Monday, when stocks can rise on great news, the future has been largely discounted. If Apple reporting great earnings can’t rise, why should Peloton which can’t deliver orders and faces safety questions for a new treadmill. Never mind that others now make stationary bikes with fancy electronics that are rather competitive to Peloton. No wonder the stock is now barely over half its pandemic peak. As we all get back to the office, are we going to buy home exercise equipment?
The market is starting to become a bit more sober. That’s a good thing. Four steps forward and a step back may seem a bit painful to some for the moment. And a step back can become two or three. It could become four or more if the fundamentals don’t hold up. SPACs were the rage two months ago. Today, with hundreds already funded looking for deals to justify their existence, the appetite for more has waned. Most already funded won’t succeed. The value sucked out by founders enriching themselves make the possibility of long term success difficult, if not remote.
I repeat, this is exactly the cleansing markets need. The fact that it is happening amid so much excess liquidity is heartening. I don’t wish for a lower market. But I don’t want the speculative fringes to ruin the economic boom for others.
To be sure, there is still more than enough money sloshing around to insure that other speculative opportunities will erupt to syphon off capital from the real world of earnings and dividends. But, as we have seen, these speculative flurries don’t last.
Just remember that in the end, facts matter. In the stock market, facts are earnings, cash flow and dividends. Not cash flow 10 years from now, but today. Real growth stories make money, gain market share, and reward investors. Story stocks spin tales and reward founders, not those chasing dreams. If today is a more sober moment, we will all be better for more of the same.
Newsman Brian Williams Turns 62 today along with Michael Palin of Monty Python (78) and Singer Adele who is 33.
James M. Meyer, CFA 610-260-2220