The Stock Market is in Much Worse Shape Than You Think

Everyone knows the stock market has been going through a rough patch recently. You can see the S&P 500 is down about 10% from its all-time high, the Dow is down 7.5%, and the Nasdaq is down 17.6%.

But this does not tell the true story. The S&P only reflects the performance of the 500 best companies in the market–and even then, it’s heavily skewed toward the biggest companies due to its weighting system. For instance, Apple, Microsoft, Amazon, Google, Tesla and Facebook combine to represent about 25% of the S&P 500’s movement.

The Dow Jones index is similarly biased toward the biggest and strongest companies on the market, as it only contains 30 component companies.

The Nasdaq Index is more representative of the total market, as it is comprised of over 3,500 companies. However, 90% of the Nasdaq Index’s movement is driven by the top 100 companies on the Nasdaq exchange (the ‘Nasdaq 100’). The Nasdaq usually goes up more and down more than the Dow and the S&P because the Nasdaq is primarily tech stocks, and tech stocks usually trade at higher multiples, which means they tend to fly higher, but they also get punished harder.

The point here is that just looking at the Dow, S&P 500 and the Nasdaq do not actually give you an accurate representation of the health of the total stock market. Normally when markets collapse, the collapse has begun long before the Dow, S&P and Nasdaq go into freefall. Because again, those three just show us how the best of the best companies are doing. These are the companies that are the least vulnerable to volatility and best able to weather economic storms.

There are other indices out there that tell us about how the rest of the market is doing, and one in particular is the Russell 2000 index, which is comprised primarily of companies that have small market capitalizations. The median market cap of a Russell 2000 company is just $922 million. That sounds like a lot of money, but consider that Apple’s market cap is $2.6 trillion, Microsoft’s is $2.25 trillion, and Amazon is $1.4 trillion.

Now, there’s a good reason that most people focus just on the big boys, and it’s because they’re the most consequential. Who really cares about a company that’s worth $922 million? That’s peanuts compared to the companies in the Dow and the S&P 500. A company worth $922 million goes belly up, nobody really cares other than the people that work at the company. The stock market should be biased toward the companies that represent the greatest share of the market.

But the reason it’s important to keep track of the smaller companies is that when the economy enters a downturn, and the bull market deteriorates into a bear market, the smaller companies and their stock prices are the first to get wiped out. These stocks are the canaries in the coal mine; if there’s trouble brewing, it first shows up in these stocks.

Think of it like high tide at the beach: the smaller companies are closest to the shoreline, and the further away from the shoreline you go, the larger the companies get. When the tide comes in, the smaller companies are the first to get destroyed.

And right now, the smaller companies are getting destroyed. The Russell 2000 index is currently down 21.8%, and in fact it basically plateaued starting about a year ago:

Now, this is not the first time the Russell 2000 has been clobbered during this 2009-present bull market. We’ll exclude the Covid Crash because it wasn’t really “real”–it was caused by a pandemic and the lockdowns, not deteriorating economic conditions. It was just a really steep, really violent correction caused by mass panic–it was not a prolonged bear market environment of consistently falling stock prices. It was over almost as quickly as it began.

Since 2009, there have been three times before this when the Russell 2000 fell more than 20%: late 2018, when it fell 26.7%, late 2015 when it fell 26.4%, and mid 2011 when it fell 30.2%. The market would make a rebound after all three of those sharp selloffs, but as we went over yesterday, this is largely because of intervention by the Federal Reserve, which has stepped in every time the market looked like it was about to crash over the past 13 years. This time, the Fed may not be able to come to the market’s rescue due to its obligation to arrest the rise in inflation, so do not assume the Russell’s sharp selloff is again nothing to worry about because it rebounded in past situations like this.

The takeaway here is that large cap stocks (the Dow) are only down about 7.5%, but small cap stocks are down almost 22%. Exacerbating this divergence is the fact that when the high-risk small cap stocks start taking a beating, investors pull their money out of them and put it into the bigger, safer stocks

But even this serious selloff in the Russell 2000 doesn’t really tell us the full story. When we look at certain individual stocks, we can see that many of them aren’t just heading for disaster–they’ve already been destroyed, along with all the people who invested in them.

If we look at the Robinhood 100 Most Popular stocks, we can see a lot of familiar names: Apple, Tesla, Microsoft, Amazon, etc. But there are other names that we can look at and see that things in the stock market have changed dramatically over the past year–even some big-time names, too.

Let’s look at some names in the Robinhood Top 100, as well as some other stocks that were extremely popular and went “to the moon” over the past 2 years and see how much they’re down from their all-time highs. Keep in mind for many of these companies, this carnage has happened in just the past 2 months or so:

  • NIO: -69%
  • Lucid Motors: -52%
  • Palantir: -73%
  • Amazon: -26%
  • Netflix: -45%
  • Plug Power: -76%
  • Snap: -67%
  • GoPro: -38%
  • Robinhood: -86%
  • Alibaba: -65%
  • Coinbase: -54%
  • Twitter: -58%
  • Rivian Auto: -70%
  • Moderna: -70%
  • Virgin Galactic (SPCE): -88%
  • Uber: -47%
  • PayPal: -50%
  • Square (Block): -64%
  • Airbnb: -35%
  • DraftKings: -74%
  • Peloton: -86%
  • Zoom: -77%
  • Roku: -70%
  • Ark Innovation: -59%. This is Cathie Wood’s flagship ETF, and it was the darling of 2020 and the first half of 2021. Now in the process of blowing up.
  • Nvidia: -37%
  • Facebook: -23%
  • Penn National: -70%
  • BlackBerry: -73%
  • AMC: -80%
  • GameStop: -80% (although still up over 2000% from the summer of 2020 when it started going crazy.)
  • Sleep Number: -54%
  • Blink Charging: -71%
  • Corsair Gaming: -64%
  • Roblox: -60%
  • Disney: -32%
  • Ford: -26%
  • General Motors: -23%
  • Boeing: -32%
  • Intel: -30%
  • Twilio: -59%
  • SoFi: -60%
  • Tesla: -33%
  • Pfizer: -27%. Even Pfizer is down big!
  • Verizon: -17%. This may not seem like a lot, but Verizon is one of the steadiest stocks on the market. It is now at 2013 levels and looks to be rolling over.
  • Goldman Sachs: -21%
  • Shopify: -54%
  • Spotify: -57%

Now, this list is a mix of real, quality companies as well as “bubble stocks,” and I’m sure you can differentiate between the two (hint: the bubble stocks are the ones down 50-80% or more).

The bubble has already burst. It just hasn’t become apparent in the major indices, yet.

Of course, the Fed could simply decide to bail out the stock market by restarting QE and refusing to hike rates, and this whole post could be rendered moot, so keep that in mind.

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