Wednesday's Market Minute: The Parallel Is Obvious

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The investing world has had a myopic focus on inflation lately. That’s understandable – the numbers have been shocking, and it’s adding a very unwelcome degree of complexity to our post-COVID recovery. But to a certain extent, the consensus has likely extrapolated too far with the possible implications of inflation.

Price gains are undoubtedly raising the specter of recession, but recent data are beating expectations at the highest and most steady clip since the initial snap-back in Spring 2020. Between inflation, the Fed’s response to it, and a consumer that’s spent much of their COVID savings, we’re in a delicate balance, but likely threading the needle.

Still, many are drawing comparisons to the rampant inflation of the 1970s, and others want to point to the Great Financial Crisis when they see housing prices ballooning the way they have over the past two years.

A whole separate group of crypto bros and gold bugs are still convinced we’re headed to a special unprecedented financial Armageddon that has something to do with the bond market and the Fed and the dollar crashing, but none of that looks remotely accurate at the moment.

It doesn’t need to be that fancy: the most obvious historical parallel for today is the Internet boom and bust. A bunch of disruptive technology companies that posted extraordinary sales growth, made old businesses obsolete, and are now past their peak growth phase. Cue the bust.

You don’t need destructive inflation for this market to inflict pain on the investors who’ve not yet come to terms with this. Remember when ARKK bulls said it was oversold down 25%? Then 50%? Now we’re 60% off the highs.

Microsoft MSFT was a relatively strong performer in the Dot-Com collapse, losing just 2/3 of its market cap. Amazon AMZN went from over $100 to single digits. The Nasdaq lost 70%. A lot of companies went bankrupt, and gems like Enron were discovered in the unraveling.

What is our Enron today? There are more than 1,000 unprofitable companies in the Russell 3000 Index, 300 of whose stocks are higher than before COVID. GameStop is at the top of the performance list, with bitcoin miner Riot Blockchain close behind. Cloud businesses like Zscaler rank high on the list too.

If an industry leader like Netflix NFLX can drop 50% in the span of two quarters, we should be braced for much more severe carnage in the companies that have unproven business models. The most interesting part of Netflix’s earnings is the fact the company formally announced it would be free cash flow positive from now on. That’s supposed to be every business’s ultimate destination.

When it’s being punished for accomplishing it, you can be sure that the reason everyone bought it for so long has now at last come to fruition, and anyone still holding profits will be eager to bail. This will be a rough blueprint for many of the winners the past two years, which were also the winners the past decade.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.