Inflation, interest rate hikes, employment, Federal Reserve taper, new omicron pandemic backdrop, Washington wrangling, supply chain disruptions, and travel restrictions are culminating and resulting in the current market swoon. September saw a 4.8% market drawdown for the S&P 500, breaking a seven-month winning streak. November saw negative returns, and thus far, December is off to a bad start. Prior to the September meltdown, stocks were very overbought and at extreme valuations as measured by any historical metric. Heading into September, valuations were stretched across the board, with the major averages at all-time highs and far away above pre-pandemic highs.
The recent two-week stretch over the November/December transition was met with heavy and vicious selling. Valuations have moderated overall and cooled investor enthusiasm, especially in the more speculative momentum stocks in cloud software, SPACs, and recent IPOs. The technical conditions (RSI and Bollinger Bands) are shaping up for a strong relief bounce that may coincide with the infamous Santa Claus rally. The tremendous volume of selling has inflicted damage across the board, indicating that valuations do, in fact, matter after all. Many opportunities are presenting themselves, and being too bearish may prove ill-advised over the long term.
As of the beginning of December, a third of the S&P 500 is off at least 15% from its high, and nearly one in eight Nasdaq stocks logged a new 52-week low. Furthermore, the CNN Money Fear & Greed Index, a composite of market-based indicators that gauge risk appetite across stocks, bonds, and options, dropped to its 2021 lows, seen during previously equity pullbacks. It has only tended to plunge below this when the market is in near-crash mode, such as December 2018 and March 2020. Continue reading "Moderating Valuations - Deploying Capital"