META - The Eye Of The Hurricane For The Current Bear Market

2023-05-30 16:03:11 ET

Summary

• With the Invesco QQQ Trust up 31.0% year-to-date through Friday, May 26, 2023, many investors believe that the bear market that saw QQQ drop 32.6% in 2022 is over.
• Apple shares are up 35.4% YTD, Microsoft is up 39.5%, Google is up 41.2%, NVIDIA is up 166.5%, and Tesla is up 56.8% YTD- all reinforcing this narrative.
• Investors are conveniently forgetting that the 2000-2002 bear market, which rhymes with the price action over the past couple of years, saw four 37% plus rallies in the QQQ.
• Thus, for many market participants that think a new day has dawned, and that we are going back to the benevolent 2009-2021 investing backdrop, don't count your chickens before the eggs have hatched.
• What is far more likely is that a vastly different interest rate landscape than what we saw during that time frame spurs a further historic capital rotation that is simply in a difficult, corrective phase right now.

"If everybody indexed, the only word you could use is chaos, catastrophe… The markets would fail."

- John Bogle, May 2017

"A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years… We are profoundly worried that this could be a risky allocation over the next 10."

- Sanford C. Bernstein & Company Analysts (January 2017)

"Life and investing are long ballgames."

- Julian Robertson

Introduction

2023 has been a very interesting year as you have had the intersection of a healthy, corrective pullback in an emerging secular bull market, which has been led by commodity-oriented and value-oriented securities, combined with the reflexive, rebound rally in growth stocks and technology-oriented equities. The simultaneous occurrence of these two events have confused most investors, obscuring the origins of the new secular bull markets.

Building on this narrative, the Invesco the Invesco QQQ Trust ( QQQ ) is up 31.0% year-to-date through Friday, May 26th, 2023. Additionally, Apple ( AAPL ) shares are up 35.4% YTD, Microsoft ( MSFT ) has advanced 39.5% YTD, Google ( GOOGL ), ( GOOG ) shares are higher by 41.2% YTD, NVIDIA ( NVDA ) has skyrocketed 166.5% to new all-time highs, and Tesla ( TSLA ) shares are higher by 56.8% YTD. Collectively, the performance of these favored stocks, and a few other favorites, like Meta ( META ), up 117.8% YTD, have all reinforced this narrative of a return to the technology led bull market that dominated price action for a majority of the past decade, and really far longer. This has led many investors to believe that the bear market that saw the QQQ drop 32.6% in 2022 is over.

However, if the 2000-2002 broader equity bear market is a guiding light, the Invesco QQQ Trust ((QQQ)) rallied more than 37% four times in that equity bear market, with one rally of 52.0% in the QQQ .

The end result is the current equity bear-market rally led by technology shares has caused a majority of investors to come to the dual conclusion that the bear market in technology stocks that was in full bloom in 2022 is over, while the energy-equity led, value bull market is over.

In summary, in its own way, the equity market is doing its best to confuse as many investors as possible, which is what the financial markets try to do en masse. Thus, at inflection points, and particularly in broader equity bear markets, it is important to think like a contrarian, going against the grain and not running with the herd. In practice, that means that today we should be ignoring the bear market rally in technology stocks and embracing the corrective pull-back in commodity-oriented and value-oriented equities.

The Current Bear Market Rally Echoes What We Saw In 2000-2002

From the October 2022 low, the Invesco QQQ Trust has rallied roughly 39% to today, Tuesday, May 30th, 2023's intraday price as I author this piece.

Looking at the chart above, this is an impressive rally in the QQQ , however, the 2000-2002 bear market saw roughly four rallies of similar or greater magnitude.

Zooming in to this chart, there were rallies of roughly 37%, 50%, 52%, and 39% in the QQQ that were advances of approximately the same magnitude or greater than the current rally that we have seen in the Invesco QQQ Trust.

The takeaway lesson here should be that the current rally in technology stocks could simply be a bear market rally that was on par with the past bear market rallies that we witnessed from 2000-2002.

Cash Is Still Not A Bad Place To Be Right Now

In January of 2022, I authored my last update on what has become one of my most popular series on Seeking Alpha, with the article titled, " It's Time To Go To Cash For The Next 7 Years - 1-Year Update ".

Periodically, I have been working on the 2023 update in this series, which I am aiming to publish in June of 2023. Needless to say, with the S&P 500 Index ( SP500 ) down from its year-end 2021 levels, and shorter-term Treasury Bills paying north of 5% yields, which illustrates a very different interest rate backdrop, being in cash has not been a bad place to be for a significant period of time now.

Adding to the narrative, if we are in a true bear market similar in scope to the 2000-2002 broader equity bear market, then the S&P 500 Index could lose roughly 45% from its recent highs, according to bear market scenario modeling by the Man Institute.

Bottom-line, those cheering the bear market rally led by technology stocks today may be singing a different tune if multiples contract to historical levels in a true equity bear market.

Despite The Gloom Backdrop, There Is Still Opportunity

In the January 10, 2023 article titled, " Marketplace Roundtable - 2023 Look Ahead - Dividends, Income And REITs ", I discussed the contrarian opportunity in Equitrans Midstream ( ETRN ) as follows.

KCI Research Ltd. of The Contrarian : We at The Contrarian are mostly known for our value-oriented calls, our macroeconomic calls, and our focus the last number of years on commodities, and commodity equities. We're "go anywhere" investors, and the focus in these areas has been because of the relative and absolute opportunities, which have been proven out by our performance, which is encapsulated in this recent article .

Within The Contrarian we run a dividend focused Model Portfolio too, which is called the Stuck On Yield Model Portfolio. This Portfolio was higher by 34.3% in 2022, strongly ahead of the broader market, as measured by the SPDR S&P 500 ETF ( SPY ), which lost 18.2%. Importantly, this Stuck On Yield Model Portfolio also outperformed in 2021, gaining 44.2%, compared to the 28.7% gain in SPY.

The depth and breadth of the outperformance was due to our focus on our targeted arena of undervalued equities. This will be more important in the year ahead, as the everything bubble unwinds with higher interest rates, which is still going to have a disproportionate impact as profit margins contract.

Idea: One key to outperformance is to look forward, not backwards, and on that note, Equitrans Midstream, which has been an under performer in our aforementioned Stuck On Yield Model Portfolio, has some potential upcoming positive catalysts, specifically the eventual completion of the stalled MVP pipeline. When this happens, Equitrans will receive a positive valuation bump higher, along with the increased prospect of a higher dividend payout.

Over the long Memorial Day weekend of May 26-29, 2023, there were two positive pieces of fundamental good news for Equitrans that jump-started the process of unlocking hidden shareholder value. First, their Mountain Valley Pipeline won a court hearing that enabled Equitrans to continue construction. Second, the debt ceiling deal between Republicans and Democrats included a separate clause that would speed completion of Equitrans Mountain Valley Pipeline.

This affirmation of the positive fundamental news has sparked a 35% plus rally in ETRN's shares today.

With this rally today, Equitrans shares are now up 29.8% year-to-date in 2023, proving that there are pockets of opportunity even amidst the backdrop of cross current market narratives.

Closing Thoughts - Investors Should Place Their Bets On The New Secular Bull Market Resuming, Not The Old Secular Bull Market Returning

Technology stocks, spearheaded by the large-cap dominated Invesco QQQ Trust have led a technology dominated, bear market rally in the broader market indices, thus far, in calendar 2023. While significant in scale, this potential bear market rally is not without precedence, as there were four similar rallies in the 2000-2002 equity bear market.

Going further, if you look back to the inception of the broader equity bull market in the depths of the COVID panic of March 2020, specifically the broader equity market bottomed on March 23, 2020, and look at performance since that date, it is unmistakably clear who the leaders of the current equity secular bull market are right now.

With a gain of 289.1% since March 23rd, 2020, the SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ) is leading the pack of index barometers highlighted above, followed by the Energy Select Sector SPDR Fund ( XLE ), which is up 251.7% since the broader equity market lows. Next, the SPDR S&P Metals and Mining ETF ( XME ) is higher by 220.9%.

The Invesco QQQ Trust is up 109.4% over this time frame, however, the Invesco QQQ Trust, despite its recent strong performance YTD in 2023, cumulative trails the new secular bull market leaders by a substantial margin. Similarly, the SPDR S&P 500 ETF ((SPY)) has gained 92.0% since the March 2020 lows, and the VanEck Vectors Gold Miners ETF ( GDX ) is higher by 52.8%.

Ultimately, while many investors think that technology stocks have resumed the bull market pole position that they occupied from 2009-2021, the following updated performance chart comparing Exxon Mobil ( XOM ) to Salesforce.com ( CRM ), since CRM replaced XOM in the Dow Jones Industrial Average ( DIA ) says a thousand words in a succinct picture.

For reference, the article that I authored on August 28, 2020, where the chart above originates from, is one of my favorites. Investors reading this today, should go back and peruse the conclusion from that article.

Wrapping up, the previously leading energy equities, which outperformed significantly in 2022, have stumbled in 2023. Having acknowledged that fact, both since the broader equity market lows of March 23, 2020, and since late August 2020 when Exxon was removed from the Dow Jones Industrial Average in favor of Salesforce.com, energy equities have led the value-focused new secular bull market.

Once this becomes clearer to a bigger swath of market participants on the next reversals of what is happening year-to-date in 2023, the secular trends will become further entrenched. Until then, investors need to ignore the cross currents, ignore the noise, focus on starting valuations, and most importantly, focus on the new secular bull markets.

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