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Saved by the bell... for now

Wild rides and ructions in the US markets this week will have left many investors on this side of the Atlantic wishing they hadn’t fallen quite so hard for those exciting and glamorous Nasdaq stars of the pandemic. The S&P 500 is heading for its worst January ever, while the Nasdaq has been through its worst two weeks since the pandemic sell-off in March 2020. Some of its constituent companies shed more than 20 per cent of their value and Netflix is down 45 per cent from its November high. US tech was at the heart of these violent swings, but falls in hyped stocks were not restricted to the US. London’s The Hut Group plummeted again this week – it’s now down more than 80 per cent in the past year – and the rout rained fresh blows on tech-exposed investment trust favourite Scottish Mortgage. Back in the US, the Ark Innovation ETF has halved in value from its peak a year ago.

This 'correction', or whatever it turns into, was not unexpected. The timing, pattern and intensity were unknown but the event itself has been awaited for some time. So what frayed nerves so badly this week? Part of it was the expected mid-week signal from the Federal Reserve that it will commence rate rises in March. Netflix’s results horror show were a factor too. They intensified the gnawing fear that as the pandemic curtain is drawn back, big flaws will be revealed in the market’s darlings. If the party’s over at Netflix then it will surely be over for others too. The prospect of a war in Eastern Europe won’t have helped, either. 

The fact that there were plenty of investors willing to jump back in and buy the dip this week might now dangerously mislead less experienced investors into believing this will always happen. The reality is that selling momentum could intensify further depending on what the Fed says and does, and on what companies say in their earnings reports. There is a precariousness to these markets, thanks to inflated valuations, inflation and the rolling back of monetary support. 

Some market watchers are even more bearish. Morgan Stanley’s chief investment officer, Michael Wilson, says that despite this week’s correction, markets are still not priced for the coming growth deceleration. A report from the IMF this week echoed that pessimism, with warnings of lower growth rates and higher inflation. It expects global GDP growth to decline to 4.4 per cent in 2022 and to 3.8 per cent in 2023, down from close to 6 per cent last year. That’s mostly due to downgrades for the US and China. In the case of the US, the IMF is assuming “lower prospects of legislating the Build Back Better fiscal package”. Meanwhile, it says China’s zero-Covid strategy could exacerbate global supply disruptions. 

The fact is, markets can be treacherous. They can tank overnight and they can remain subdued for years. This month's dramatic swings will have given some their first taste of a correction, and a hint of what a real slump might feel like. Perhaps it is only now all those admonitions to tread carefully through the markets will hit home. The ones that warn us to watch out for valuations that are detached from reality, for biases that blind us, for bubbles dressed up as new paradigms, for prices that cannot be justified, for hype, for crowd hysteria, for overexposure. But this time around, investors with high tech exposure or high-risk strategies who now better understand their own appetite for volatility and losses, have been given a reprieve. Thanks to the market rebound, they might now have time to adjust and rethink their portfolios. What they should not do is give up on tech (it is the future) or think they have failed. Everyone gets caught out from time to time; markets always recover (eventually, although individual holdings might not), and most encouraging of all lots of good companies usually get thrown out with the bathwater, which means a chance to buy quality at a good price.