On Jan. 25 it had risen another 18%. The target was the sky, the fund's goal. That day was the high-water mark for the fund. Manager Cathie Wood would make more headlines, and indeed the fund has been retreating for a full year now.
That same week was also the peak for meme stocks. Based mostly on social-media enthusiasm, these issues exploded during late 2020. Like ARKK, those stocks surged at the beginning of 2021, then promptly fizzled. Bed, Bath & Beyond (BBBY), Peloton Interactive (PTON) and especially the most famous one of them all, GameStop (GME), achieved their all-time highs in January. (AMC Entertainment (AMC) went on for a few months longer, but it eventually peters out, too.) A spate of recent articles has buried meme-stock investing, but in truth those securities had long been dead in the water.
Also under pressure have been special-purpose acquisition companies, or SPACs. While new SPACs (including, last week, Digital World Acquisition Corporation (DWAC)) continue to be launched, SPACs which completed corporate mergers have disintegrated in their thousands throughout the past year. From February to September in 2021, an index of SPACs lagged the S&P 500 by 49 percentage points, reported Goldman Sachs. Now that's a bear market!
The common thread connecting SPACs, meme stocks, and the companies owned by ARKK was plenty of hope for the future and (negligible or zero) current earnings. In short, those purchases were not investments; they were speculations about the stock market’s speculative securities. And as the other stocks kept rising, those outlandish claims fell, too. The chart below doesn’t include SPACs and meme stocks, where I have no index data, but does show how ARKK performed from late January through early November 2021 relative to segments of the stock market.
Two more dominoes
Unsurprisingly, small-growth stocks finished right behind ARKK. Meme stocks, SPACs, ARK’s fund, they’re the ground floor of speculation. The second is the pervasive cohort of small-growth companies, as represented by the US Small-Growth Index. These kinds of businesses are more steady than those that sit on the first rung of the corporate ladder, but their stock-market fates still depend heavily on investor euphoria. These usually take a hit, when buyers become cautious.
That started happening in early November. True, RICK's performance was even worse (as was that of meme stocks and SPACs, although once again their returns aren’t shown), but small-growth companies, as a whole, did experience a correction through year end, having given up 11.4% of their value. Large-growth stocks lagged for much of that period but delivered a slight decline, and the US stock market was flat overall.
This year we’re witnessing a third domino: large-growth stocks. From the new year until this past Wednesday, large-growth companies were invited to the party. But ARKK was again the first to fall. (Summing the losses for the fund from the three charts in this article totals a loss of 65 percent. Lucky for the fund’s shareholders, the math is different. (The fund’s total decline is 49 percent.) This time, though, big-growth stocks fell along with their small-growth counterparts.
Canary in a coal mine?
On Jan. 5 of this year, my former colleague John Coumarianos wrote an article that was eerily prescient. Pointing out that the small-growth indexes were sagging, and that the most aggressive of such indexes were performing the worst, John opined whether such behavior was the proverbial canary in coal mines. The last time small-growth companies lagged so much behind other stocks, he notes, was in early 2000. Soon afterward, blue-chip growth stocks did the same, flipping belly-up.
As they have since done. Now that’s market-timing!
The key question, of course, is whether this month’s bloodshed marks the final crisis in the process or just the jump start for it. That is very dependent on corporate earnings. These days, while the 2000-02 technology downturn is mostly seen as the ineluctable result of an investment bubble, the valuations were only part of the story. The other half had been eating away at profitability. Revenues of companies in the US Technology Index fell 50% from February 2000 to February 2002.
Today’s blue chips don’t seem to have a similar future. But as Yogi Berra may or may not have said, predicting is hard, especially about the future. But it is hard to imagine what might sink the operations of the leading growth companies like Amazon.com (AMZN), Apple (AAPL) or Microsoft (MSFT). For one thing, the developed economies do not appear to be late-cycle, rather they seem to be early on. Perhaps a collapse of the Chinese economy? But that is the thinnest of guesswork.
Risk off
There is a degree to which the stock market’s current action can be explained by the saying “risk on, risk off.” By that framework, speculative investments and the ones referenced in this column, or emerging-markets equities do well when central banks are colluding and investors are giddy. But in times of tighter money and warier investors, a flight to quality ensues. Aggressive securities sag, safer investments rise.
With the Federal Reserve warning that money will get harder to come by, aggressive securities have in fact faded. Cryptocurrencies have also dropped hard since early November, in addition to growth stocks. That said, risk isn’t off and safety on, or vice versa. Over that time, the traditional havens, Treasuries and gold, haven’t been exactly blooming, with Treasury prices weakening (if only modestly) and gold more or less flat. Adding to the confusion, that most experimental of marketplaces, transactions involving non-fungible tokens, continue to thrive.
So to summarize, the equity beating I’m seeing today feels ominously bit like what’s been playing out for the past 22 years, when a sell-off in speculative stocks foreshadowed much greater losses. But the historical comparison will only be complete if growth-stock earnings do likewise.
