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Why isn’t the stock market down anymore?

Here’s a live look at the S&P 500 while some parts of the market are being completely destroyed:

Let’s take a look at the carnage.1

You can see that the S&P 500 remains the Rasputin of all stock markets:

We are less than 3% from all time highs, yet it looks like the market is on the verge of disaster.

The Nasdaq 100 is down about 6% from its highs, so big tech stocks are still holding:

Small cap stocks are in the midst of a correction as the Russell 2000 is now down more than 11%:

This makes sense when you realize that small caps are consistently more volatile than large caps. Over the past 10 years, the Russell 2000 has experienced six separate double-digit corrections, including three fairly brutal bear markets.2

During the same time frame, the S&P 500 has experienced four corrections, including a single bear market.

So far things are not looking so bad.

But first take a look at the high-flying ARK Innovation Fund (ARKK):

It is down about 50% from its all-time high.

I could include dozens and dozens of other stocks but here is a list of some name brands that are all in the midst of their own personal bear market:

Then you have companies like Robinhood, Zillow and Peloton that are over 70% off their highs.

By my calculations, there are currently 100 stocks in the S&P 500 that are down 20% or more from their 52-week highs.

So what’s happening here?

How is the stock market overall holding up so well when it seems like so many stocks are being killed at the moment?

Most pundits will tell you that this index is being helmed by all the biggest names. After all, Apple, Amazon, Microsoft, Google and Facebook make up about one-quarter of the S&P 500.

The idea is that generals get shot last, so these companies will be the next shoe to leave.

That may have happened, but it looks like some of these stocks have started to decline:

All these five stocks are much below the market right now.

One explanation here is that value stocks are ultimately outperforming growth stocks. In terms of declines, larger value stocks outperformed larger growth stocks by nearly 6% in this correction:

Small-value stocks outperform small-growth stocks by 12%.

It is also instructive to see the performance of the field. I’m cherry-picking here, but these are sector returns from mid-February 2021, when many high-flying growth stocks peaked:

The S&P 500 is up about 20% over the period, so sectors that are outperforming are energy, financials, real estate and materials. These aren’t the most exciting industries people are paying attention to, so it’s not surprising that investors may have missed out on this rotation.

Take a look at the performance of some of the biggest financial names over the past year:

All these stocks are falling fast. This is another cherry-picked datapoint, but Berkshire Hathaway has outperformed bitcoin by 40% (37% to -3%) over the past year.

Basically, we’ve seen a performance rotation from exciting growth stocks to boring old stocks of great value.

Maybe the rest of these stocks will eventually catch the carnage. It’s always a possibility.

But if you’ve been wondering why some of your favorite stocks are down 20-60% while the stock market doesn’t care, now you know the answer.

It looks like investors are pushing growth stock prices to the point where the fundamentals can’t possibly justify those valuations.

And the areas that were left in a dead-end state were set for periods of rising inflation and high economic growth.

This doesn’t always work out neatly for index investors, but it’s another feather in the diversification cap.

Further reading:
Updating my favorite performance charts for 2021

1All numbers through Monday off.

2Down 26% in 2016, 27% in 2018, and 42% during the 2020 pandemic crash.

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