Weekly Market Update with Brian Ransom 21 January 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

The S&P 500 continues to slide and is now down 5.4% from all-time highs. Currently, the stock market continues to battle through inflation scares and rising interest rates as volatility picks up.   

In the news this week, China has cut it’s equivalent of the Fed Funds rate to help add liquidity to a slowing economy. Existing-home sales here in the US hit a 15 year high in 2021. Since a “correction” is defined as a downturn in an index of 10% or more, the Nasdaq is now in correction territory as of the 19th.

With the technology and growth-heavy Nasdaq index entering into correction territory following three years of +25% annual returns, industry analysts are prognosticating that many technology and growth stocks were actually in a bubble and that bubble may have just popped. In today’s update, I’ll examine some of the intricacies revolving around the growth indexes and the stocks driving some of the bubble chatter.

The quintessential stock market bubble is the Dotcom bubble that formed in the late 90’s. During that time, returns in the S&P 500 were dominated by the largest holdings in the index with elevated valuations. We’re seeing a similar dynamic today with the top 10 stocks in the index making up 31% of the market capitalization of the S&P 500, a level not seen since the year 2000. Likewise, those top 10 stocks are very elevated in price at a similar level as the Dotcom bubble. Bears would argue that a concentration in stocks with elevated valuations would be an indicator of a bubble.

However, elevated valuations alone do not constitute a bubble. When those valuations become disconnected from earnings, that prompts the official formation and subsequent popping of a bubble. While the top 6 holdings in the S&P 500 leading up to the Dotcom saw significant growth in earnings, beginning in 2001 those earnings fell by nearly 24%. The significant drop in earnings is ultimately what sparked the significant drop in stock price and the subsequent collapse in the growth indices.

Therefore, if this is indeed another growth stock bubble, then we should see a similar significant drop in earnings from the top holdings in the index that changes the long-term growth trajectory of those companies with elevated valuations. That drop in earnings, as of January of 2022, has not happened. And investors should ask themselves whether or not that makes sense based on the business fundamentals and financial analysis.

For more information on this topic or a variety of other topics including market updates, financial planning, and wealth management please like, subscribe, and follow. And I’ll see you next week!

Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 20, 2022, from FactSet Database. 

2.J.P. Morgan Asset Management. “Guide to the Markets.” 1Q 2022, as of December 31, 2021. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/,

3.FactSet Research Systems. (n.d.). Company/Security Financials. Retrieved January 20, 2022, from FactSet Database. 

Signature Wealth Management Group is registered as an investment adviser with the SEC. Signature Wealth only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. 

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. 

Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. 

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

Past performance does not guarantee future results.

Consult your financial professional before making any investment decision.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. 

Market capitalization refers to the total dollar market value of a company's outstanding shares of stock. Commonly referred to as "market cap," it is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. The use of words such as “will”, “may”, “could”, “should”, and “would”, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. 

Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

The S&P U.S. Style Indices measure the performance of U.S. equities fully or partially categorized as either growth or value stocks, as determined by Style Scores for each security. The Style series is weighted by float-adjusted market capitalization (FMC), and the Pure Style index series is weighted by Style Score subject to the rules described in Index Construction.

All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.