Where are we?
It's always good to have a map.
This is my fourth real market decline (if you count March 2020 which I’m not sure I would.) I was around for the 1987 crash and the following recession but I was still working at IBM so wasn’t yet a “professional.”
The 2000 crash was very difficult not just due to financial losses but to the many layoffs that I had to do in the wake of drastically shrinking revenues for tech-focused firms like ours at the time. (SoundView).
Also, 2000 was really more of a tech crash so if you shifted into other industries then the next few years were actually quite fruitful. As the DoR at a generalist firm, I was able to find new opportunities outside of technology to invest in.
I think 2008/9 was a better example of a massive drawdown. We had panic. Correlations were close to one for all asset classes so everything went down at the same time. We even had big firms that disappeared due to leverage. (Interesting we don’t have that yet this year but IMO we will.) Even companies unrelated to the financial crisis, like NVidia $NVDA, got very cheap in 2009.
That brings me to the “map” below. I’ll be doing some follow posts on valuation but I can tell you that stocks were broadly and objectively very cheap at the start of 2009. That is not yet the case today. In some areas perhaps but the chart speaks volumes about how far we have come and where we might need to get to in order to find stable ground.
You can see the 2000 to 2002 drawdown. Another example from that time is that storage maker EMC was trading at *net cash* and generating $400M in free cash flow per year. We had a similar situation in 2009.
Like any chart, the picture changes depending on where you choose the starting point. But it “looks” like we got a little hyperbolic in 2021 and that feels like it needs to be burned off.
If I keep things really, really simple I’d say that we closed 2019 at around 330 on the S&P 500. We had a COVID dip in 2020 and a post-COVID roar in 2021. Maybe a reset to that level +/- a few points is a good target.
My personal opinion is that we need to *at least* be there before I can be constructive on the market overall and it’s not unusual for these things to “overshoot” one way or another.
Better to pay a little more for stock back in an uptrend than to try and “find the bottom” on your own.
This is a “patience is a virtue” kind of market!