A mind-numbing $2 trillion has been wiped out from the market capitalization of the eighth largest publicly traded US corporations since peaking around the middle of November in terms of combined value, opening a window for bottom-seekers to pick up potentially undervalued stocks available at discounts.
The November peak of $11.7 trillion in the combined market capitalization of Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Meta Platforms (FB), Nvidia (NVDA), and Berkshire Hathaway (BRK-A, BRK-B) represented a surge of 168% using the pandemic low of $ 4.3 trillion as the baseline.
Apple flirted with a valuation of $3 trillion and crossed it briefly but has since settled at more humble numbers.
On Thursday, the NASDAQ Composite (^IXIC) opened 3% lower, under the shadow of the war declared by Russia on Ukraine. However, there were several upward movements, particularly in megacaps such as Alphabet (GOOGL, GOOG) and Microsoft (MSFT).
The US Treasury yields (^FVX, ^TNX, ^TYX) have surged even as inflation reared its head sharply in the fourth quarter. It is, however, the shorter maturities that gained faster than the longer ones, resulting in a flattening of the yield curve. Combine this with an extremely hawkish Federal Reserve, add the toll extracted by the currently prevalent Omicron variant of Covid-19 in terms of spending and factor in reduced productivity with large populations calling in sick for extended stretches of time, and the grim picture emerges clearly.
Financial stocks, as well as growth companies that were seen as ‘pricey,’ have taken a hit as the yield curve has flattened. The S&P500 (^GSPC) has witnessed an advance only in the energy sector so far this year, of about 20%, driven by WTI crude oil (CL=F) that crossed $100 per barrel, a level last seen in 2014.
Average megacap stock return this year is negative 17.6%. The leader of this unhappy pack is Meta, which is running 41% lower, driven by a major disappointment in earnings. Alphabet, that dropped 7.5% after the earnings announcement, is down 12% so far this year, while Nvidia and Tesla are off by about 20% each.
Bottom scrapers continue to be on the lookout for signs that may indicate the bottom has been reached. Christopher Vecchio, senior strategist at DailyFX.com, was on Yahoo Finance Live when NASDAQ opened lower by over 3%. He weighed in with his recommendation to bottom seekers and suggested they should look at CBOE Volatility Index (^VIX) and the CBOE VVIX Index (^VVIX) for indications of heightened levels of fear.
“During other market sell-off episodes, two things have popped out that suggest we’re nearing an exhaustion point. That would be [the] VIX above 35, and VVIX — the volatility of the volatility index — moving above 150. We didn’t see that yesterday. It’s likely that we’re going to see that today,” said Vecchio.
That day, Thursday, VIX topped out at 38 by mid-day while VVIX maxed out at 145.
Broader index levels falling to levels not seen since last year is something that is not ruled out by Vecchio. This could provide hope to some for an opportunity to invest once again for at least a short period of time.
“Both the Nasdaq and the S&P 500 are coming into some technically significant levels — really going back to the May 2021 lows. And I do think that at that point in time, given the specter of this sell-off, it becomes sensible from a risk-reward standpoint — at least try to cherry pick a short-term bottom,” he said.
Mark Mahaney, tech analyst at EvercoreISI, echoed the sentiment on Yahoo Finance Live. He believes buying quality names, like Amazon and Google, at these levels, could be a good bet with a reasonably long investment timeframe. “If you have a 9 to 12 month outlook, you will be able to start off buying the highest quality names,” said Mahaney.
According to Vecchio, the main story is not Russia, though it may be a catalyst that is accelerating the trends. There are several larger themes at play in the market. “This all ties back to what’s happening with the Fed in March. Russia is an accelerant here, but the conditions are in place for weaker stocks. You have a decline in corporate earnings, a weaker growth environment and of course record high inflation.”
Against the new geopolitical realities playing out, analysts believe that the monetary tightening process is unlikely to be front-loaded by the Fed. Vecchio expects a hike of 25 basis points in the benchmark rate in March and not 50, despite whatever may be the inflationary picture at that time.
“[U]ltimately given the scale of the decline we’ve seen thus far — looking into those May 2021 lows — it is a stopping point for further bleeding,” said Vecchio, referring to the price action in the S&P 500 and Nasdaq early Thursday.