Investors have had a great run since 2009 due to central banks adopting the ‘Ben Bernanke Doctrine’. This argued that what was good for markets, was good for the economy. Or as he put it in November 2010:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
As a result, they destroyed markets’ key role of price discovery.
Whenever markets hit an air pocket, they rushed to the rescue with $tns more stimulus. But now they have junked this policy and gone back to Paul Volcker’s Doctrine – based on trying to keep inflation under control.
And as always happens when a bubble bursts, investors are finding to their cost that:
“Markets take the stairs up and the elevator down.”
Already this year, formerly high-flying Facebook (now known as Meta) and Netflix have fallen by around a third as their results disappointed. The chart shows the suddenness of the downturn. And it could easily have been worse:
- Amazon’s Q4 results from its core warehousing business were terrible with income down by ~50%
- But it “lucked out” by reporting an $11.8bn windfall gain (82% of its reported earnings) from its stake in EV-maker Rivian
I like Rivian, having watched all the episodes of Long Way Up. But it is a concept stock with no earnings. So its $55bn valuation is absurd, and another sign of the Fed’s bubble-blowing power.
The problem is that investors can no longer assume a 10% fall in the major indices will lead to a major new stimulus programme from the Federal Reserve. And China’s housing market 40% drop in January sales also disappointed those who were “sure” that President Xi would never really burst the real estate bubble – on which so much of the post-2009 global recovery has depended.
STOCK MARKET LEADERSHIP IS DANGEROUSLY CONCENTRATED IN JUST A FEW COMPANIES
The issue is that by last summer, more than half of the NASDAQ 100’s gains were due to just 7 companies. And the top 5 were 22% of the whole S&P 500 – the world’s most important stock index. Even today, Apple is 13% of the NASDAQ 100, Microsoft is 10%, Amazon 6%, Alphabet (formerly Google) 8%, Tesla and Facebook (now Meta), 4%, Netflix 1%.
It’s been a fabulous ride, but now it is coming to an end. Investors are starting to realise the Fed has changed its policy, and has now gone back to focusing on inflation. So one by one, more and more fundamental questions are being asked of the 7 former favourites as the chart shows:
- Since the beginning of the year, Meta and Netflix are down around 30%, Tesla is down 13%
- Even Microsoft is down 9%, Amazon down 5%, Apple down 3% and Google down 1%
The problem for investors is that they can no longer make money via momentum trading – buying what everyone else is buying.
Instead, they now have to relearn fundamental analysis, based on the insights of the great investor (and mentor for Warren Buffett), Ben Graham. The chart – based on his tried and tested formula – shows these 7 “bubble stocks” are still far from their fundamental values, as of Friday’s close:
- Tesla is most over-valued – 1797%; Amazon is 573%; Netflix is 452%
- Microsoft is 383%, Apple is 337%, Google is 300% and Facebook 202%
History suggests that once a bubble starts to burst, it’s hard to stop. As I noted here 2 weeks ago, naive investors will likely jump in from time to time, trying to pick the bottom. This is why the strongest rallies always take place in bear markets. Unfortunately, they then learn their lesson the hard way.