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Today, I feel investors are partying like it’s Christmas 2021. Back then, the S&P 500 and Nasdaq Composite hit fresh daily highs. But what happened next was the biggest stock market crash since 2008.
Stock market crash, part 2?
Stock markets have risen strongly since their October lows. The S&P 500 hit its 2022 low of 3,491.58 on 13 October. On Friday, it closed at 4,136.48, leaping almost a fifth (18.5%) in under four months.
The Nasdaq Composite has soared from October’s bottom of 10,088.83 to close at 12,006.96 on Friday. Its rise of 19% is almost exactly in line with the S&P 500.
I thought US equities looked cheapish at that time and my wife bought six mega-cap stocks for our family portfolio on 3 November. But I’m surprised at how far and fast the market has rebounded since. Alas, I smell trouble ahead — and possibly even another stock market crash.
To me, this is a ‘rally of rubbish’
What worries me is that unhealthy speculation has returned to markets in 2023. Irrational exuberance in 2020/21 drove the prices of stocks, bonds, property, and digital assets deep into bubble territory. In late 2021, I repeatedly warned that this ‘everything bubble’ would burst, triggering a stock market crash.
When markets collapsed last year, my wife and I lost money, but far less had our portfolio not been braced for a crash. And as asset prices surge upwards again, I’m sure that this ‘dash for trash’ will end badly.
Predictably, the most highly speculative, beaten-down assets and meme stocks have soared during this latest bounce. For me, gains from these highly risky assets bear no resemblance to underlying company fundamentals and wider economic reality.
For example, this table shows the outsized returns since end-2022 from six highly volatile stocks, plus Cathy Wood’s most popular exchange-traded fund, and the #1 cryptocurrency:
| Carvana Co. stock | 204.9% |
| Riot Platforms Inc. stock | 101.8% |
| Tesla stock | 54.2% |
| AMC Entertainment Holdings stock | 49.4% |
| Bitcoin | 37.5% |
| ARK Innovation ETF | 37.2% |
| BlackBerry Ltd. stock | 36.8% |
| GameStop Corp. stock | 20.5% |
Note that these big returns have arrived in under six weeks of 2023. For me, there is no rational explanation for these bumper gains. Meanwhile, the iShares MSCI ACWI ETF is up 8.2% in 2023 — a global benchmark that these booming bubble assets have exceeded by miles.
Retail frenzy and short covering
On fundamentals alone, there is no explanation for these gains. Options-driven short-term trading and outright gambling seem to have contributed. US investment bank Goldman Sachs reckons that surging markets have forced short-selling hedge funds to cut their shorts. As bets on stock declines go bad, funds are ‘short covering’ (buying back stocks to halt their losses).
Obviously, another element in what one Financial Times editor called this “flight to [expletive deleted]“ is retail investors betting on bombed-out meme stocks and crypto-based assets. For many, this ended in disaster in 2021/22. In my view, it is likely to happen again. And while 2022’s biggest losers may well become this year’s biggest winners, I wouldn’t bet on it.
One a more positive note, I do not expect this speculative trading to trigger a wider stock market crash. Instead, while some trash will crash, the wider market should emerge mostly unharmed. But I’m avoiding any wild wagers right now by only buying quality stocks!
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