Why this is no plain-vanilla dip

Friday’s mini-rally notwithstanding, it’s getting ugly out there as my former CNN colleague Jack Cafferty used to say. You’ve seen the numbers and they aren’t pretty: Worst start for a year for stocks since 1939. Big tech companies have lost trillions of dollars of market value. Looking at your portfolio is like a kick in the gut.

The carnage is not equally distributed, though. While the Dow (^DJI) is down 11% year to date, (the market peaked on Jan. 3 — conveniently the first trading day of the year), the tech-heavy NASDAQ (^IXIC) is off a bone-crushing 25%.

As if that’s not bad enough, stay-at-home and meme stocks, SPACS and oh my lord, crypto are worse. Examples: Peloton (PTON) was off 60% at one point, SPACS are down 43% on average, and Bitcoin has fallen some 55% from its November peak.) That means there’s some method to the madness.

Risky bets are getting pounded the most.

How many of us bought those glittering objects, only to get burned? Conversely, how many of us rushed out to buy Dow components Chevron, Honeywell or P&G? The former is up 43% year-to-date (Warren Buffett picked up some), and while HON and PG are down year to date, it’s only by single digits. But no, we had to fly high. And now we’re falling hard.

A cutout photo of Berkshire Hathaway CEO Warren Buffett welcomes investors and guests as they shop for deals during the first in-person annual meeting since 2019 of Berkshire Hathaway Inc in Omaha, Nebraska, U.S. April 29, 2022. REUTERS/Scott Morgan

Speaking of Buffett, I have to laugh at just how classic this turn of events has been for him and Berkshire shareholders. As I recently noted, as with countless bubbles and manias past, Berkshire trailed the market, causing another generation of naysayers to insist Buffett had lost his investing touch. Not!

A new environment favors a different group of stocks

A brief recap of why the market is taking it on the chin: The persistent COVID pandemic, Putin’s invasion of Ukraine, plus the rise of nationalism and decline of globalism, all of which is torturing supply chains and driving up inflation. Meanwhile, the Fed is raising rates and reducing its portfolio to prevent the economy from overheating.

I’m not saying all of that is going to be bad for the stock market forever, but at the very least this new environment will favor a different group of stocks, like oil and gas producers, and companies that produce and sell in the U.S., for instance. One emblematic signal from this week: Saudi Aramco has surpassed Apple as the world’s most valuable company.

“As the Fed raises rates, there’s been a lot of concerns around even if the base case is not for a recession in 2022, what does it look like beyond, in 2023 and beyond,” asks Sonali Pier, PIMCO managing director and portfolio manager. “And that’s really why we’re seeing some investors pivot from cyclicals into non-cyclicals, and really getting concerned about companies where they have lower margin businesses, and that will find it difficult to be squeezed by inflation. And as a result, you can see that there’s been a preference for defensive names.”

“We were over-risked through most of 2020, and 2021,” Tracie McMillion, head of global asset allocation strategy for Wells Fargo, tells Yahoo Finance. “And we pulled back on our risk so far this year. We’re getting more conservative within equities in terms of our asset class allocation, and our geography. We’re tilting towards the U.S. We’re tilting towards large- and mid-caps and away from smalls.”

Russian President Vladimir Putin chairs a meeting with officials on fighting wildfires, via video link in Moscow, Russia May 10, 2022. Sputnik/Mikhail Metzel/Pool via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

Russian President Vladimir Putin chairs a meeting with officials on fighting wildfires, via video link in Moscow, Russia May 10, 2022. Sputnik/Mikhail Metzel/Pool via REUTERS ATTENTION EDITORS – THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

Returning to Putin for a second, it just makes sense to go risk-off, as they say on Wall Street, and hunker down when you have an unhinged autocrat with nukes hinting at World War Three. Who wants to be all giddy with growth stocks given that?

Are we headed for a recession?

I understand this thing could turn around on a dime and maybe Friday was the beginning of that. But say it doesn’t. Will this market meltdown and surge in inflation cause a recession? Not necessarily. All kinds of unfortunate events like stock swoons and rising prices, as well oil price shocks and, (as we’ve seen), pandemics can cause recessions. But it’s not inevitable. For instance, neither the flash crash of 2010, nor the bear market of August 2011, nor the market sell-off of August 2015, nor the 19.73% market decline in the fall of 2018 precipitated a recession.

The closest corollary to our recent quandary might be the 2000 tech bubble bursting and the subsequent recession of March 2001 to November 2001. As noted, stock market crashes often don’t have enough systemic impact to crater the whole economy, but the 2000 blow-up did. And of course that recession was exacerbated by the attacks of 9/11.

But we probably have even more serious exogenous factors this time around (COVID, Putin, supply chain issues and inflation.) All that plus a losing market are more than enough to cause the global economy to contract.

Regardless, it’s likely we will see some reckonings in this unhappy season. Cathie Wood’s Ark Innovation ETF rebounded strongly Friday but is still down 54% this year and was recently off more than 75% from its high in February 2021. Wood’s recent inflows however have been strong reportedly, and lately she was snapping up depressed shares of Coinbase (COIN).

Then there’s Tiger Global, which has reportedly been hit by $17 billion in losses year to date, erasing about two-thirds of its gains since its launch in 2001. According to the FT other funds, like Coatue Management, run by so-called Tiger Cubs, (fund managers who once worked for Julian Robertson’s Tiger Management) are reportedly also being battered as they had larded up on stay-at-home names like Peloton and Zoom (ZM).

And from Silicon Valley, Crunchbase reports that prominent VC Andreessen Horowitz’s big flying IPOs are now, well, not so much:

“Of Andreessen’s 17 portfolio companies that went public at initial valuations of $1 billion or more in roughly the past 18 months, all but one are trading below their offer price. And even the one outlier — Airbnb — is down from its first-day closing price,” Crunchbase noted.

Bottom line: The market may shoot back up anytime, but this doesn’t feel like a plain-vanilla dip to me.

This article was featured in a Saturday edition of the Morning Brief on May 14, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

By Andy Serwer, editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer

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