The Correction Began In 2021
The 2022 stock market crash began in 2021, evidence below.
Summary
Corrections begin with a loss of momentum.
Markets in 2021 were trading at historically high valuations.
Markets began to lose momentum in the spring of 2021.
2021 was a volatile year.
Money printing by the Federal Reserve and the U.S. Government began to cause serious concerns about inflation in 2021.
Historical Highs – Bubble Valuations
According to many, in 2021 the U.S. stock market reached extremely high valuations as measured by numerous valuation metrics. One of the broadest measures of stock market valuation is the ‘equity market cap to GDP’ metric; Warren Buffett’s favorite coincidently. Simply, some investors gauge the value of the stock market compared to the economy (value of all stocks divided by GDP, as determined by the sources listed at the bottom of the graph below).
Between 1870 and 1996 the stock market has typically held a value of 50% of GDP. The dot.com bubble pushed the ratio up to a ratio of 150%. The money printing by the Federal Reserve Bank and the US Government, after the 2008 Credit Bubble, has pushed the ratio up to about 200%. This is roughly four times the historical average.
NYSE Composite Index – momentum failure
The NYSE Composite Index is a broad measure of the U.S. stock market, it includes all NYSE listed companies. We can see that momentum failed in the spring of 2021. As of May 2022 gains going back to January 2021 have been lost.
New York FANG Plus Index – the leadership group loses momentum
The FANG Plus Index is comprised of the 6 largest technology, mega cap stocks. Many investors consider FANG+ to be the leadership group over the past ten years. Momentum failed beginning in the spring of 2021, the index traded in a flat narrow range during the year, and eventually broke into a bear trend in 2021. About two years of gains have been lost.
S&P 600 Small Cap Index – momentum failure in 2021
Many consider small cap stocks to be the proxy for the U.S. economy, the S&P 600 Small Cap Index spent 2021 in a narrow trading range. The consolidation zone eventually failed and the index entered a bear market in January 2022. Any gains going back to January 2021 have been lost.
In Conclusion
2021 was a narrow market, if investors did not own highly valued bubble stocks they likely did not have gains. In 2021 the markets were signaling exhaustion, momentum was failing, and bull trends were beginning to break down. This was a note of caution to investors from the markets.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
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DEFINITIONS
Equity Market Cap to GDP Ratio – Simply the total value of the U.S. stock market divided into U.S. GDP.
NYSE Composite Index - The NYSE Composite Index is an index that measures the performance of all stocks listed on the New York Stock Exchange. The NYSE Composite Index includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth, therefore, makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated based on their free-float market capitalization. The index itself is calculated based on price return and total return, which includes dividends.
NYSE FANG PLUS Index - An index that provides exposure to 10 of today’s highly-traded tech giants. The index launched on 09/26/2017, prior performance (09/19/2014 to 09/25/2017) is based upon backtested index calculations. Gross total return variants are shown for all of the indices in the chart. The NYSE FANG+™ Index is an equal-weighted index.
S&P 600 Small Cap Index - The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
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