What caught my eye this week.
The speculative stock sell-off I flagged up at the start of December has started to chip away at the markets more widely.
The US Nasdaq index is more than
10% 14% off its highs.
Several mega-cap tech shares – a big chunk of the US indices, and hence a meaningful stake in global tracker funds – are down about the same, too.
Microsoft and Meta (née Facebook) are 10-20% off their highs. The biggest, Apple, is getting there.
And ‘FANG’ stock Netflix1 plunged more than 20% overnight on earnings suggesting pandemics don’t last forever and growth is slowing hard.
Other former blue-sky high-fliers have already lost more than three-quarters of their value.
Look at price graphs of Peloton or Zoom2 for a taste of what happens to story stocks when the story changes.
The first cut is the cheapest
So far the declines only amount to about a 6% drop in a global tracker fund, from a UK perspective.
Pretty piddling. Could it get worse though?
Who knows – but veteran investor Jeremy Grantham is sure it will.
The founder of GMO and a self-styled witcher when it comes to bubble bursting, Grantham warns:
Today in the U.S. we are in the fourth superbubble of the last hundred years.
Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle.
The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.
Read Grantham’s entertaining note for more, including graphs like these:
As Geralt Grantham sees it, the bottom-right corner is about to get… interesting.
Now, you should know that Grantham has been calling the US overvalued for years. In 2013 Grantham foresaw the market going 20-30% higher before crashing. He’s been using the word ‘bubble’ since at least 2014.
Timing is the perennial curse of those who’d oppose a runaway market – but eight years is still a long time to claim you weren’t wrong but early.
With that said, anyone who lived through the Dotcom bust will recall the pattern of the frothiest stocks falling first.
We’ve seen sufficient crazy madness over the past two years to tick Grantham’s ‘euphoric’ box, too.
Add rising yields (even in Germany), expectations of rate hikes in the US – roiling growth stocks and government bonds alike – and a flattening yield curve, and Grantham might have all the ammo his bubble-bursting needs.
Steady as she goes
Naughty active investors (like me) will act as we see fit, for good or ill.
Wiser passive investors shouldn’t panic. Not least because they’ll probably do better than most active types just by sticking with their plan.
Think how often our Slow & Steady portfolio updates begin with The Accumulator shrugging off some brouhaha, then detailing further gains.
As Aswath Damodaran – dubbed Wall Street’s ‘Dean of Valuation’ – conceded this week even as he calculated stocks were 10% overvalued:
If you look at history, it seems difficult to argue against the notion that market timing is the impossible dream…
The most important thing is to have a well-constructed, diverse portfolio.
You could have owned almost anything up until late 2021 and seen it go up.
Everyone is a genius in a bull market.
In a bear market we all feel like idiots. Crashes come with the territory of investing, but don’t make it harder on your future self than it needs to be.
Put yourself in a position to hold – and ideally buy more – in a slump.
For now: have a great weekend!
Asset Allocation Quilt: winners and losers of the past ten years – Monevator
From the archive-ator: How to maximise your ISAs and SIPPs to reach financial independence – Monevator
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UK shoppers slash spending after Christmas spree, Omicron – Reuters
Amazon pauses plan to block Visa credit cards in UK – Which
House prices surge as fewer properties come to market – Yahoo Finance
Britain has around 2,000 ISA millionaires – Independent
UK State Pension system not fit for purpose, finds MP report – Guardian
British firms start six-month trial of four-day working week – Metro
By 2050, a quarter of the world’s population will be African – Guardian
Products and services
Yorkshire BS has launched a lottery-style savings account – ThisIsMoney
Probate fees set to rise on 26 January – Which
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Cash machine withdrawals fell another 6% in 2021 – ThisIsMoney
Tesco Bank rolls out Clubcard Pay+ for all its customers – Which
Homes for sale in ‘super’ villages, in pictures – Guardian
Comment and opinion
Why indexing US small cap stocks hasn’t worked – Morningstar
The Big Squeeze is on, and Rishi Sunak’s tax hikes add to it – David Smith
A day to remember – Humble Dollar
Don’t wait until your 70s to shelter from inheritance tax – ThisIsMoney
Why everyone thinks the inflation numbers are wrong – AWOCS
Create memories, not regrets – Spilled Coffee
Assuage – Indeedably
Why do investors buy the most expensive assets? – Behavioural Investment
Joy vs meaning vs work vs money mini-special
Efficiency makes you happy – Joachim Klement
The high cost of an easy job – Of Dollars and Data
Reviewing The Sweet Spot and 4,000 Weeks – Ben Casnocha
Crypt o’ crypto
Could blockchain speed up homebuying? [Search result] – FT
FCA moves to reign in UK’s crypto boom – TechCrunch
Coinbase to enable NFT purchases via Mastercard – Decrypt
Naughty corner: Active antics
Selling out – Howard Marks
The DIY investors that others pay thousands to copy – ThisIsMoney
Peloton and the kiss(es) of death – Investment Talk
Japan: entrenched perceptions ignore an improving reality – GMO
An old interview with Peter Lynch and John Templeton – Novel Investor
How likely are you to catch Covid multiple times? – Guardian
WHO says Omicron won’t be the last Covid variant – CNBC
Hamsters abandoned in the streets of Hong Kong on Covid fear – HKFP
Kindle book bargains
How to Build a Memory Palace: Books 1&2 by Sjur Midttun – £0.99 on Kindle
Scrum: The Art of Doing Twice the Work in Half the Time by Jeff Sutherland – £0.99 on Kindle
The 5AM Club: Own Your Morning by Robin Sharma – £0.99 on Kindle
Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle
The best ways to buy an electric car… [Search result] – FT
…and what it’s like to own one in the UK – Guardian
A lot of online returns end up in landfill – NPR
Pristine coral reef discovered off the coast of Tahiti – Guardian
How the refrigerator became an agent of the climate crisis – New Yorker
Off our beat
Tim Harford on the monopoly on Monopoly [Podcast] – The New Bazaar
Microsoft’s $69bn purchase of Activision Blizzard encapsulates an industry in a deal – The Ringer
“We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events.”
– Daniel Kahneman, Thinking, Fast and Slow
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Thanks for this.
I find it funny that the recent stock slump brings prices back to where they were a few months ago. So nothing to worry about.
Alternatively the end is nigh, all those growth stocks like Peleton and Netflix are going to lose you money – and that’s before inflation!
(Let’s not even mention crypto bubbles).
Best strategy? Keep calm and double down (or keep investing)
I ain’t got Michael Burry’s cojones. But I am glad he’s shorting Tesla, because I loathe Elon Musk and his fanbois. And that goes for pretty much all of Big Tech. WTF do they think the proles are going to earn all the money to justify those multiples?
OTOH I have significant capital to shift into the market. Bring on the Big One. We have seen this movie before. My average price for VWRL has been £70. I’d like to buy a lot more of it for less than that. Pretty please….
Personally, I’d love Jeremy to be right. A fall of 50% in the S&P, probably 80%+ in some techy things. Sounds like an opportunity. Sounds like fun.
Doubt it will happen though. Yes, the heroin addict has a really bad habit and it’s killing him. But the dealer doesn’t have another customer, so he must be kept alive whatever the cost. The Fed put is weaker than any time in the last two decades, but it’s not completely expired. Moreover, what we learned from 2020 is that govts are also now willing to become dealer if necessary.
Jeremy is now 83. I’ve met him many times over the past twenty five years. He’s right about the damage all this wealth creation is doing. I hope he gets to see this bubble deflate but I fear he may pass away before the drug addict does.
Re: Peloton. Did people really did think that strapping an ipad to an exercise bike was a “break through” innovation? Personally, I just strapped my ipad onto the exercise bike …
A basic question but could someone tell me where all this money is going if people are selling out of the stock market? What are they doing with it? I thought inflation was high so people wouldn’t want to be sat in cash?
Talk of a correction seems a tad strong to me as a passive index investor when Vwrl is down only 0.7% from where it was 3 months ago, yes it’s -4% vs a month, but it’s still +9% up vs a year ago. It depends where you draw the relative data point from.
Things seem to be getting a little hairy out there. I’m inclined with my strategy to keep my head down and carry on, but as always it’s interesting to read the thoughts of more experienced people and how they may be reacting.
Thanks as ever for the website and peoples contributions.
I’m also hoping for a significant correction. I started investing ‘seriously’ when COVID hit and poured money in at very low prices (compared to today).
Now I’m left with most of my ISA allowance still sitting in cash and want to do it all again! 🙂
I know, I know, it’s time in the market – not timing the market….
@Limette @ermine — Wanting to get better prices is understandable, but vastly easier seen through the rear-view mirror, mostly because very few people do the maths on the opportunity cost of sitting out a bull market for years.
Nick wrote the definitive article on this, with data, concluding:
@Basic Instinct — That’s definitely not a basic question, it’s probably *the* question over the medium term. The week ended with a modest bond rally, so perhaps some money fears falling stocks more than rising rates / inflation at this point.
It’s true there’s no big correction in broad market trackers, as I say in the piece. I wouldn’t be excessively reassured by this. All prolonged crashes start with a particular sector selling off hard. (Dotcoms, financial crash, etc). That’s not to say whenever a sector sells off hard it will become a bear market though. For instance resource stocks cratered a few years ago and the market marched far higher.
In short: active calls aren’t easy, however it seems when reading an online comment or looking back five years 🙂
@ZXSpectrum48k — Jeremy’s accent really throws me. Anyway his work a few years ago on commodities seemed to have missed the mark, but perhaps not quite so much in 2022?
@GFF — The reason this crash is so painful is that most US stocks have fallen — many by a lot — compared to the averages. The volume of new 52-week lows in the Nasdaq versus highs yesterday looked almost cathartic. The snag is that in a bear market things can keep looking cathartic haha.
I’m not sure this will be a full-blown bear market, mostly because I’m one of those weird loners who still expects inflation to roll over by the middle of the year (absent v bad new variants and bigger problems in China). But so far it’s proceeding just like you’d expect a bear market in this kind of environment (widely ‘overvalued’, post-euphoria, imminent tightening, no obvious recession in sight) to proceed IMHO.
@BasicInstint. I think you making an assumption that the sellers have cash to allocate elsewhere. They might not. Most of the flow indicators are showing that real money investors equity allocations have hardly moved this year.
Where we are seeing a big shift is in retail accounts. While retail buying of broad equity ETFs is very healthy YTD, we see a different pattern in both leveraged and single stock flows. Retail futures and option buying is at a 1 year low. Buying of single stock names is also very low. This flow has been a key component during the last 12-18 months; much bigger than typical.
If retail are deleveaging then there is not necessarily any money to come out. In fact, margin calls may mean they need to sell other assets.
Indeed, Friday rather looked this way.
Still, I do think @BasicInstinct’s question is valid at a broader level. Passive investors wondering and frustrated about a 60/40 portfolio aren’t 100 miles away from institutional allocators (at least those with discretion) seeing bonds still on very negative yields and prices falling when deciding what to do with equities. If inflation comes in as I expect then that will make bonds look more attractive, but then it will also make those high duration equities look less (over)overvalued. I’m perhaps talking my own book here, but I could see it all oscillating into some kind of new equilibrium.
But yes, very good point from @ZX on leverage. Surely why Bitcoin et al fell 10% on Friday, too (leaving aside whether one thinks those go to zero or the moon in the long term 😉 )
Btc showing it’s volatility again this week
This call kicked-off because of rising inflation and the Fed stopping QE and moving to tightening.
But because stocks have fallen won’t that mean inflation will reduce as people become poorer and can’t afford things. Plus businesses will stop investing. Hence we get a recession.
Which means interest rates don’t rise too much?
I’ve been gently nudging my allocation towards market weighting (too much UK, too much emerging, not enough US, at the moment), and this seemed like a good opportunity to top-up the US. But hang on – if the tech sector crashes then the US share of the market capitalisation will fall. So should I just wait until the indexes adjust their weighting (which seems to be quarterly, mostly) and see where I am? Being actively passive gets confusing…
Thanks for the thoughts @zxspectrum48k and @theinvestor. My understanding from what you’ve said is it sounds like the sell off is coming from people who couldn’t afford to be buying what they had and had bought it with other peoples money or on credit.
I’m all for the market being overpriced and whipped up into a frenzy by people like this when ive built my pot and come to sell. For now though it seems like companies with strong real actual cash fundamentals will be back in favour over “the story type stocks” which promise a bright tomorrow. From an index perspective this may offset some of the losses from the Peletons of this world.
Once the people who have sold down what wasn’t there’s, presumably it would still require a sell down from investors with real money invested to generate a significant market collapse to a broader index such as vwrl. Where these investors would put their cash at the moment when inflation is high, property such as btl less attractive and at high valuations, I still don’t see?
I know it’s very different times now but would be interested if anyone knows what investors did with their cash after the 2000 share collapse?
I’m finding the situation fascinating. Re: defensive position, I’m personally seeing the least worst option as cash at present. I’m not convinced that bonds won’t continue to drop from here, and at least with cash I have some optionality to move into equities if we see further falls.
But being a user of pretty much indexes only, so far it’s not even feeling like a little dip as of yet. I’ve been leaning slightly away from US large cap, and in this period my allocations in emerging markets, value funds, gold and heaven forbid the UK (!) have been holding up pretty well so far, even seeing some small gains in the last month. I hope the rotation into these areas continues, but we’ll see.
I’m moving 50% income ITs and 50% VWRL
I am no longer working, don’t need to leave anything as no kids so will let the divis re-invest when the market is low and take the cash when it’s high. Anyone else a similar approach?
I can’t speak for @ZX but I’m not saying that or what follows, you are 🙂
What I’m agreeing with is that *some* aspects of the sell-off *probably* come from this direction, especially recently given indications in the price action on Friday.
But many stocks have been selling off for many months now. And as I said above, everything is proceeding exactly like a bear market crash usually does.
So what I am saying is I can foresee a range of different things happening. This isn’t a cop-out. It’s reality! 🙂
However you decide to invest, appreciating you don’t *know for sure* anything and thinking in ranges of probability is extremely helpful.
I’ve annoyed engineers before by observing that in my experience they make poor investors (generalizing obviously). I think trying to resolve this inevitable uncertainty too hastily is probably why. 🙂
To answer your question there were loads of alternatives in the Dotcom crash. It was mostly a narrow band of tech stocks that crashed, though many mildly overvalued companies also slid for a few years. Value shares did very well. Consider you could get 5% or more on cash, anyway (I did at the time and sat out the crash, purely through luck 🙂 ).
It was a very different time.
@David C — Exactly. I am skeptical that soaring yields can crush tech valuations but *not* trigger a recession that does for value shares. People think lower rated value shares do well in recessions. That’s not the case, usually. People pay up for growth when it becomes scarce. Value shares need economic expansion, generally.
Then you have the fact that inflation hits ‘productive companies doing real things’ very hard on the cost line, with both input and labour. The US banks showed this in their earnings this week, with massive increases in the cost line due to wage hikes.
It’s very murky. Muddling through a bunch of ups and downs as I say does seem very possible to me though.
I think the dot com crash is a very relevant parallel.
Central banks pumped in liquidity because of the Y2K bug. This time it is the COVID-19 bug.
Make a fortune day trading. Make a fortune in crypto.
It was different that time, too.
Tide goes out, we find out too late who has been skinny dipping.
Many corporate charlatans are revealed. Who knew!
Plus side is you might get to reuse your ‘don’t panic/don’t sell’ post from 2009, again.
a) the analysis is IMO primarily focussed on accumulation;
b) lots of work around showing DCA is less optimal than “all in” for those lucky enough to be holding a lump sum; but the psychology of “all in” is tough; and
c) some of us probably do not have forty years left
@Basic Instinct #12
> when ive built my pot and come to sell.
But when does that actually happen for you? Unless you are buying an annuity your investments are still being held providing you an income. And if you are selling units to derive that income, a crash is a very tough place to be – because a steady income burns much more of marked down capital.
> I know it’s very different times now but would be interested if anyone knows what investors did with their cash after the 2000 share collapse?
In the case of this investor, watch a few companies go down the toilet, because tech is fundamentally hype and piffle in the early days, sell out into the suckout, buy a CAT FTSE all-share ISA with government approved fees of 1% (!) and finally sell out in 2003.-ish Guess where the dotcom low water mark was 😉 Burned £14k in today’s money, and a damn good education in hindsight. Since it was money I had been earning, not big deal in hindsight.
Although my capitulation was particularly badly timed, retail investors in those days tended to follow a similar track. It’s the only way some of us learn. There were other pathologies that burned people too, like investing outside ISAs and finding they owe a shedload of capital gains tax from the year before, only to find the capital gain disappeared the next year like summer rain, so they get to re-mortgage their house. I think about that poor devil every time Monevator tells you to use your ISA allowance 😉
Shares have been relatively benign to me, as well as returning that loss in spades ten years later, it was minor compared to the evil UK housing market, which rushed me a lot more than that and I am still steaming about though I am now grizzled and mortgage free. That hit me much harder and much younger, and could have ended up very badly had I lost my job at the time, both houses either side were repossessed. At least in the USA you can walk away from the house without recourse, unlike here where mortgage debt follows you round like a lost dog even if you lose the house.
But yeah, we’ve seen this movie before. And will probably see it again.
For the past several years numerous commentators have loudly and confidently proclaimed that you’d be an idiot to own any government bonds and we’re reckless suggesting there’s still any place for them in a portfolio.
We’ve quietly tried to remind people that anything that hits development market government bonds hard will almost certainly hit stocks harder.
YTD ($) returns from @CullenRoche on Twitter:
Vanguard Total World: -5.9%
S&P 500: -7.8%
Nasdaq 100: -11.6%
Total Bonds: -1.6%
Global 60/40: -4%
Yeah, not so much eh? 😉
I bet there are some people making a nice profit now from some active trading or some option hedges. I’m not one of them but I’m really happy with the way my total portfolio has been performing so far and haven’t worried at all. The best bit is the low maintenance required 😉
I’ve been all in and have done very little throughout the recent down market apart from investing some cash that had accumulated from dividend payments. Still I am very happy with my performance so far (tracked religiously every week). I’m down 1.6% from my previous peak today.
Thanks @theinvestor, I wasn’t trying to put words in your mouth! Whilst there has been a sell off of certain stocks over months, to my earlier point vwrl though is only down -0.7% from where it was 3 months ago. As a passive investor personally I’m focused on the index not individual stocks (maybe I’m wrong with this approach!). I can see what you mean that there are many similarities now with what presides a major crash. We’ll have to see, but I’m still left with wondering if there is a crash and everyone liquidates their holdings, what do they do with the cash!
@ermine it’s a great question, guess that’s what makes it personal finance! Personally I’m a long way off state pension age – if it still exists. The pot will fund I guess a bit more jam, whatever that is, perhaps an early rip cord pull, enforced if I can’t stay relevant or ideally from choice. I’m just trying to build the pot now.
I feel fortunate people are on here who are a little further along and are willing to share their experiences. Thanks.
I started my investment journey in Sep 2020. Basically messed around for a year with target allocations that changed based on the last article that I had read. Ended up with 11 different funds. All passive. Still made 9.8% in 2021, though no genius there.
One of the The Accumulator’s articles triggered me to rationalise down to two funds. The time out of the market managed to cost me more than I had hoped so was a bit annoyed at myself.
Learning from TI above that Global 60/40: -4% so far this year has cheered me up as I am only down 2.8% despite being 61% equities.
22 days of beating 60/40… get me!
Me and my partner intend to buy property this year, so I swallowed my FOMO and pulled every penny (not in a pension wrapper) out of the market in mid-December. I’m now parked in an easy-access cash ISA and premium bonds, both paying <1%.
What I'm saying is, 2022 is going to be another +20% year, so chill.
@Basic Instinct — All good. I just have to clarify sometimes as otherwise in a year or two people come back and quote a misunderstanding. (Quite prepared to be judged on the stuff I do say and foolishly get wrong, of which there is plenty enough. 😉 )
Interesting times indeed. What happens next is a guess, I am accidentally cash heavy at this moment and that cannot change until March at the earliest, perhaps this will prove a blessing, time will only tell. Looking back on my investments over the years my style has changed slowly with the years put in. As I age, I seem not to be as concentrated, and as the portfolio develops, it is easier to see the beauty of diversification. (European value did not so bad). All of it seems like luck, ten years ago I made mistakes and survived and I will probably make plenty more and still survive. The world needs businesses and if global growth stalls we are all in the same boat, just some have a better lifejacket than others. Plenty dry powder, still got most of this year’s ISA allowance x 2 to use and I am watching things get cheaper. It is too soon to call a crash
I felt uncomfortable a fortnight ago with how highly the US market was valued and took a chunk out of equities into cash. No detailed rationale for that, other than pretty monstrous P/E ratios where any disappointment at all was going to get heavily punished, plus a deep distrust of Russian leadership, and most of all a resolve to try to be content with getting adequately well off and not to try to get as monied as humanly possible. We will see what the next week brings. I would not be surprised to see a deep decline but equally not surprised to see a bounce back if the Fed try to say comforting things. I think I’ll be content either way with my reduced equity allocation.
On the other side of the portfolio, the main hope is in big chunks of inflation-linked funds. I will start to buy back into straight government paper if and when 10 year yields hit 2% and will keep doing that in increments up to 3% if we ever get there.
I’m defence asset heavy too, now more so than last week, haha. but had been ‘rebalancing’ this direction over the last year or so, in part listening to the profits of doom/sound advice I’ve seen on here. My portfolio is tech biased, mainly index tracking equity, plus defence assets, around 40:60 now. So towards either end of the risk spectrum. First mild panic instinct aside, I am still good with the long terms and the volatility that entails. The question now is when is cheap enough to rebalance back some.
Having lived and lost through the dotcom bust I don’t see the comparison is all that close yet – internet/web2 is more commodity like, however a surge in value towards web3, defi or the metaverse may change that.
This has been only a minor correction so far but Bitcoin is not behaving like a digital version of gold at all. It’s become highly correlated with technology stocks and it couldn’t be further away from a safe heaven asset at the moment. A 66% 40-day correlation with the NASDAQ doesn’t really help to diversify a portfolio exactly when you need it. Meanwhile, real gold keeps doing its own thing and more importantly, retains its low correlation with both equities and bonds.
@TBDW To be fair BTC has never been involatile, the comparison with gold only goes so far as a reference to its finite supply and long term deflationary behaviour (so far). The volatility is the nature of the beast I think, in permitting relatively frictionless movement of capital compared to the yellow metal.
The correlation with the indices I’ve noticed too, adds another dimension not totally explained by the increasing amounts held on co. balance sheets, Id surmise in part a measure of it becoming more widely/institutionally held as a tradeable asset rather than by hodlers?
The tussle between it and Ethereum shows BTC holding up better in the recent downturn. It can all change very quickly.
@Calculus (#29) – My point was just about this ongoing speculation that bitcoin might one day replace gold or at least play the same role. It seems that the data so far is suggesting that if this is ever going to happen, it’s not about to happen any time soon.
One of the most useful features of gold is its historical low correlation with equities and bonds (and how these can even become negative in a crisis). Another one is the way it has responded historically to real interest rates and how it behaves as an independent currency.