Market fall may have just begun: Chris Wood

New York, Feb 19: In his latest weekly newsletter, Christopher Wood, Global Head of Equities at Jefferies suggested that the recent fall in the market could just be a start and more drawdowns may be possible.

 

 

 

He likened the current situation, especially selling in tech stocks, to the bursting of the dot-com bubble at the start of the millennium. At that time shares of tech stocks crashed first, followed by a wider market a few months later.

 

 

 

“The 2000 Nasdaq rout could be a useful precedent here since the dotcoms collapsed first with the Nasdaq composite turning down from March 2000. But it took another six months before the S&P500 started to decline,” Wood pointed out.

 

 

Tech stocks in the US, and elsewhere, have seen heavy selling in the last couple of months. Nasdaq 100, which comprises almost all technology stocks, is trading down 16 percent from its peak a few months back. Perhaps, none have seen more wealth destruction than Facebook investors. Once the world’s sixth-largest company with a valuation above $1 trillion, the Facebook parent closed on Thursday with a value of $565 billion, placing it in 11th place behind Tencent Holdings. Some of the weaker tech names like Nikola have lost about 90 percent of their value from their top.

 

 

This selling, though, may not be over — whether they are tech stocks or not. “Overall, the current situation can best be summarised as the inverse of Goldilocks. It also continues to look ever more the case that the FANG stocks peaked as a percentage of S&P500 market cap back in the summer of 2020,” Wood said. “In this respect, the rotation out of growth stocks will probably not be completed until the leaders of the bull market (i.e. the FANG stocks) succumb in a more decisive fashion.”

 

 

Amid pricey valuations, making money in the market has become difficult as various uncertainties have propped up their heads. The biggest among them is the sharp rise in interest rates over the next few months. Estimates are showing rates could rise as much as 150 bps as the Federal Reserve races to contain record inflation in the US.

 

 

Woods contacts this with a different approach taken by the central bank of emerging market economics. The Reserve Bank of India has refused to budge on its stance of supporting the economy and markets, while the Chinese central bank even eased the rates. In such a situation, he pointed out, stocks in the US and China have acted differently. He is going to go long on Alibaba and short Amazon, extending his fruitful strategy of October last year when he shorted Facebook and went long on JD.com.