No two selloffs are alike. That said, we always want to try to trot out the descriptions of the old bone-crushers when we get one, so that people can learn from the mistakes of previous declines.
I see some similarities. Take 2000. We had a huge lead up, and endless run-up from 1998 to the third month of the year, and then we had what felt like a never-ending selloff. Is that what's happening now after a 10% plummet from the high in the Nasdaq? To refresh, the Nasdaq composite stood at 1585 at the beginning of 1998 and then roared to 5100 in the third month of 2000, dropped to 3155 in May, came back to 4243 in July, and then 19 years ago today fell back to the level the move started.
Now we have had so many selloffs that were horrendous: the 1987 crash when stocks, all stocks, were cut in half in a couple of hours' time. We lived through the 2007-2009 Great Recession, where stocks, again, were cut in half, the Dow, laid to waste, 14,000 down to 6,500. Then there's the crash of 2020 itself with the Dow tumbling from 29,680 to 18,000 in March, and the Nasdaq plummeting from 9627 to 6932, contiguous to when a couple of hedge fund managers came on CNBC and pretty much painted an apocalyptic view. Of course, they failed to recognize that there are people who can make it so history doesn't' repeat itself, and they include the Secretary of Treasury Steven Mnuchin, and the Federal Reserve Chairman, Jay Powell, who played the role of saviors, and played it well. It's amazing to think that the big hedge fund managers were doing all of the panicking, the younger generation doing all the buying.
But it's what happened after that has caught the attention of so many: The Nasdaq ramping from 6771 to 12439, before last week's clobbering. There are enough people around, including yours truly, that get goose bumps thinking that last week could be the beginning of the analogous 2000-2001 collapse.
Last week I called in from vacation to make the point that I don't even care if we have a replay of 2000. In fact, as I said, no two sell-offs are the same.
But you know what is the same?
There are a lot of new investors in this market. Some have come in because of the $1,200 free money provided by the government. Some have come in because of the extra unemployment break the Feds provided. Still others have been attracted by no commission trading. That has attracted younger people in droves and, as someone who believes individual stock ownership in addition to index funds, I welcome the newbies.
But the newbies tend to lack three things: a knowledge of what they own; an understanding that stocks can go down as well as up, because, as their putative leader, Dave Portnoy, of Barstool fame, explains, stocks only go up; and history, history of any kind.
I have too much history.
I always thought if we ever got to a situation that could even look like 2000-2001, I would not brand it with that scarlet letter. I would simply want to explain to people that it is imperative not to give back all of the gains, whether they are lucky gains or gains from technical analysis, or even gains from a buy high, sell higher momentum strategy.
Now we are going through a three day losing streak and, other than the crashes I have mentioned that's usually when the selling dries up, particularly for tech, which has born the brunt of the decline. I expect it could be the case again, given that we are at entering a seasonally positive portion of a terrible month for stocks.
But I do want to flesh out my comments from last week, when I called in from vacation and I don't want to do so just because someone described me as looking like a tomato. What an insult to my mighty fine tomatoes!
Last week, I saw a picture in the aforementioned Dave Portnoy's hilarious twitter feed that had a picture of bunch of younger gents, all in vests, with a caption that said, "here are your eight newest millionaires."
I applaud these young people. They risked money and they made money. Do I know what they invested in? Was it in companies they knew well? Was it in stocks with great momentum? Was it just a four letter game of scrabble? I don't care. They wagered and what they wagered on went higher.
I like that.
But let's leave the stock casino for a moment. If we were at the horse races, you put your money down and if you win, you collect. It's finite. If you decided to bet on an NFL game, you can't let it ride if you win. The game is over. You collect.
But if you are in the stock market, there is no window. There's no collection. There's only one thing you can do. You can sell.
And here's where many of the younger people disagree with me. They don't want to collect. They don't want to cash out. They don't seem to have any fear.
Of course, callow youth breeds invincibility in all forms, including stocks.
That's why I am saying I don't care if they refuse to recognize the history or dismiss it as the fright of the suits who would keep younger people in their chains if they could.
I just want to give you some rational fears that should back up my imploring, my begging that something be sold on what I expect to be a bounce.
Rational fears. Not irrational fears. Rational fears.
First, when you go up as far and as fast as we have, you are going to run into stocks that do not go up on great results. That's what happened last week to all sorts of terrific, but extended tech stocks. When you get that reaction, you must do some selling.
Second, there is a rotation out there right now that is about a return to normalcy. What does normalcy mean? More travel, so the airlines are going higher. More eating out, so the Chipotles (CMG) and the McDonald's (MCD) and Dardens (DRI) do better. More shopping so some of the retailers that have been left behind can rally in the face of the decline of Amazon's stock. Rotations elude the ken of the younger investors. They either don't believe in them or don't understand them. Suffice it to say, when employment grows, the bigger institutions leave tech stocks that do well no matter what and gravitate to stocks of companies that are going to have surprising year-over-year performances. You don't have to take my word for it, but it's empirical. Rational fear.
Third, when we get back from Labor Day in an election year the presidential contest becomes front and center. The contrast between these two candidates is so stark as to take your breath away. Hate him or like him, President Donald Trump uses the Dow and the S&P and the Nasdaq as measures of his presidential performance. Former Vice President Joe Biden, like almost all Democrats post-Clinton, doesn't really have much interest in the stock market. It's the province of the rich and it and companies should be taxed accordingly, which means higher.
Finally, there is so much money in so few stocks and so many stupid exchange-traded funds that augment that it is entirely rational that declines in Tesla (TSLA) , Apple (AAPL) , Microsoft (MSFT) , Amazon (AMZN) and Facebook (FB) can pull down a dozen exchange-traded fund as well as the S&P itself. If you think that stocks always go up in the end, you won't care about what I say. But do this. Pretend that stocks are like NFL bets. Act as if it's a lottery ticket and cash some of it in. Think rationally. Not greedily. I promise you that you will not regret it.