This year’s volatile market hasn’t impacted everyone the same. Some stock pickers are feeling a lot of pain.
First, let’s look at the big picture. The S&P 500 is down 7.6% year to date, and this drop has been highlighted by some dramatic intraday volatility. Last Monday was a notable example, with the Dow Jones Industrial Average having two 1,000 point swings in the same day. It started the day falling more than 3%, then ended the day positive.
But peak under the hood, and you’ll find even more pain.
Over 1,600 stocks in the NASDAQ are down more than 50% from their 52-week high. Yes, down more than half! For context, the S&P 500 peak-to-trough decline in the 2008 financial crises was 49%. All in, the number of NASDAQ stocks that are down more than 50% exceeds the number that met those same criteria during the COVID crash of March 2020. You’ll have to go back to the 2008 financial crises to find the last time this level was reached.
What’s driving this dynamic? Growth stocks are coming back down to earth. Since the March 2020 lows, certain corners of the market have been noticeably frothy. Some examples that come to mind:
- Special Purpose Acquisition Vehicles (SPACs),
- “COVID-economy” stocks (think Peloton and Zoom),
- Meme stocks (think GameStop and AMC),
- Stocks in high growth industries (think Biotech or electric vehicles)
The prospect of higher interest rates seems to have hit these stocks hardest, in part because their valuations were the most stretched.
The lesson? Picking individual stocks is much riskier than investing in the broader market. While we can always be confident that the market will recover, anything is possible with individual securities. Many go to zero. Diversification, on the other hand, reduces risk and increases the reliability of future returns.
There’s never been a better time to be diversified.
Source: ChartStorm by Callum Thomas
