A Matter of Perspective

The NASDAQ is down almost -30% from its November 2021 highs. Unlike the pandemic drawdown, this sell-off doesn’t have a clear catalyst.

It’s unfolding in fits and starts and has investors pointing at a growing list of potential causes – rising rates, a tightening Fed, inflation, slowing growth, high valuations, disappointing guidance, etc.

Whatever the cause, this sell-off feels extreme. Many investors feel like they’ve reached a breaking point (make it stop) and others believe the worst is priced in (buy the dip). Either sentiment is understandable.

On the surface, the current sell-off appears extreme. It makes previous crashes from 2020, 2007, and even 2000 look insignificant (Figure 1).

Figure 1: NASDAQ 100 Index

But there’s a major problem with taking Figure 1 at face value. The current value of the NASDAQ is multiple times higher than what it was twenty or even ten years ago. As a result, the price swings in terms of points look huge compared to what we saw during the financial crisis or the tech bubble.

To compare apples to apples we should look at the moves in percentage terms. Figure 2 shows the same time period for the NASDAQ 100 on a log scale (vs the linear scale in Figure 1). From this perspective, we see it is the current sell-off that actually looks insignificant.

Figure 2: NASDAQ 100 Index (Log Scale)

This highlights the substantial downside risk that remains in the stock market in general and richly-valued tech stocks in particular. The dot-com bubble of 2000 saw the tech-heavy NASDAQ fall by more than -80%. That should put the current less than -30% move into perspective.

As I wrote in January, investors “losing their lunch” over recent moves should brace their stomachs for more volatility because the real ride hasn’t yet begun. A recession would be the final nail in the coffin for full equity market capitulation.

While there is still hope that strong employment and consumption could hold recession at bay, we are drifting ever dangerously closer to impact. At BCM, we’ve been steadily decreasing our risk exposure since the beginning of the year.

At some point, markets will look hopeless and there will be nobody willing to buy the dip. We’re not there yet, but we’ll get there. Ironically, it will also be a great buying opportunity for those willing and able to see past the hopeless bottom. It’s all a matter of perspective.

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Victor K. Lai, CFA