January 26, 2022
The stability seen over the past two sessions comes after the S&P 500 (SPX) reached oversold conditions after an ~11% decline from peak. The drawdown meets the definition of a correction, and understates the decline in equities more broadly. The SPX is has high exposure to long duration, low-vol stocks that still trade a record premium to others. Through yesterday, the average stock in the Nasdaq Composite (CCMP) was down nearly -50% from it’s recent peak and the average stock in the Russell 3000 is down more than -30%. The Russell 2000 (small cap stocks) is off ~13% from recent highs but have spent the last ~12 months derating with the index little changed despite large upside to earnings. Small cap stocks are usually the primary beneficiary of a cyclical recovery, but small cap relative valuations are now at 20-year lows and almost 5 multiple points below pre-pandemic levels. Relative valuations have reached absurd levels, and they won’t stay there.