With the S&P 500 index down 10% below its last high, the Nasdaq-100 index off almost 15% from its November peak, and the Russell 2000 Index of smaller companies down nearly 18% from its own latest high, it’s fair to say that it’s been a rough start to the year for the stock market. Wall Street is steeling itself for things to get worse, portends an article in Bloomberg Businessweek, as the market prepares to bear out losses without help from the Fed for the first time in a while.
Companies themselves have strong balance sheets that will keep them on solid ground as the losses roll in. It’s the most speculative assets that are plummeting the most, and firms who have gone all in on speculative assets have felt the pain. ARK’s Innovation ETF is down almost 55% from the soaring high it reached a year ago, and cryptocurrencies have fallen tremendously. “It’s almost as if the markets are holding a stress test to find out what’s real and what isn’t,” the article contends, as investors yet again reassess their plans for future success and the high valuations they’ve been shelling out.
Comparisons to the turn-of-the-century dot-com bubble are inevitable, but should only be taken so far. Extremely profitable and durable companies dominate the Nasdaq-100 index now, and today’s environment is the result of an incredibly unique circumstance: the pandemic, the Fed’s stimulus, and a swift rebound that has actually put a lot of stress as the supply side struggles to keep up with demand. In the wake of that rebound, policymakers are pulling back from stimulating the economy further, and executives will need to deal with rising borrowing costs in addition to higher prices for materials and labor. Factor in geopolitical tensions, and market turmoil is inevitable.
With the S&P 500 gaining an average of 24% annualized over 3 years, it’s unlikely that the pullback will do real damage to growth, and help could also come in the form of S&P 500 companies’ incredible financial health. Alphabet Inc. holds $142 billion in cash in the 4th quarter of 2021, Microsoft had $131 billion, and Amazon had $79 billion. Those companies are also carrying little debt in relation to their income: the S&P 500 Net-Debt-to-Ebitda Ratio was barely above 1 at the end of last year. If you look at that same ratio in 2007 before the 2008 Financial Crisis and in 1999 before the Dot-Com Crash, they were 4.25 and 3.88 respectively. The robust health of these companies could stop the bleeding by allowing them to spend more on buybacks if their shares fall too much, the article maintains. And, they can acquire attractive businesses. Companies that are flush with cash at the moment can boost their growth more by spending that money on acquisitions than by hanging onto that money.
Some analysts believe the market will manage a small gain this year, a far cry from the spectacular returns of the past 3 years. While the actions of the Fed or healthy companies may not be enough to keep the market from having a terrible year, it’s possible that this is just another step in the painful process of finding our way back to normal.
