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The Call

Updated: Jul 20, 2023

The bear market that happened during the Black Monday crash of October 1987, the worst day in history for the U.S. stock market, is the only example since 1965 of the S&P 500 falling more than 20% without any recession to follow it.

Last month’s maximum drawdowns were 16.58% for the Nasdaq 100 and 11.97% for the S&P 500, so while it felt terrible, we avoided the 20% decline widely taken to signify a bear market.

However, it felt like stocks just fell too far for sellers to want to keep selling, and that is not bullish. It made for a nice little trading bounce, but the V bottom of March 2020 is extremely rare-- more often than not, charting a bottom looks a little like the Mammoth Mountain logo:

(Yes, I think about Mammoth a lot this time of year.)

But in all seriousness, a Mammoth logo/chart can be used to illustrate how this type of bounce can suck investors back in by creating the appearance that the worst is over—especially with growth stocks.

The Nasdaq 100 trades at 25 times forward earnings, down from 30 at the end of 2021. In the past two major selloffs, the price-to-earnings ratio fell at least to 18 and as low as 16 before a meaningful rebound started. At the current earnings forecast of $569.6 per share, the index would need to fall more than 25% before the P/E hits 18.

The spread between growth stock valuations and value stock valuations (based on enterprise value to EBITDA or cash flow) is still near record highs. So, there’s a long way to fall for expensive growth stocks before value players will find them cheap enough to bother with. Unprofitable companies can pretty much forget about it; they will find it nearly impossible to attract new support.


Even with all of that being said, valuation doesn’t really help much at times like this. After such a sharp market move, what happens next will depend more on trading or technical factors than any measure of long-term value.

Turbulence starting with valuations this elevated, interest rates this low, and inflation at a four-decade high is indeed unique; there is little precedent. For investors, it remains vital to watch the macro data — and the bond market’s response.

A couple of weeks ago, we started calling for a recession prior to this year’s midterm elections, but it’s significant to note that there are very few on the Street who are joining us. The market’s January pullback didn’t take us down more than 20%, which was a positive indicator.

Yet the yield on 30 year Treasuries fell to 2.06% last week, and I just want to scream at the yield curve, “Invert already, dammit!” Like, let’s just get it over with.

Additionally, consumer confidence collapsed last month, dipping all the way down to levels not seen since the financial crisis.

So, we may be setting ourselves up as a bit of a tall poppy out here on the West Coast (again), but we’ll wait and see what the rest of February has in store. In other words, we’ll just wait for The Call-- have you seen this? It’s amazing:

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