The Nasdaq has started the year with a bang! The Nasdaq dropped 8.98% last in January 2022, making it the second-worst January on record. But this 8.98% decline does only tell half the story. Things are much worse when looking underneath the surface. The smaller companies in the Nasdaq have been absolutely destroyed.
Bank of America recently reported that an incredible 2,648 out of 3,682 stocks in the index have entered bear market territory, defined as a decline of more than 20%. Even more remarkable, nearly half of the stocks listed on the Nasdaq are down more than 50% from their 52-week highs. There have only been a few other times over the last 20 that we’ve seen this many stocks down 50% or more (during the dot-com crash, the financial crisis of 2007 to 2009 and the March 2020 COVID-19 crash).
The Russell 2000 Index, the most widely quoted measure of the performance of small cap stocks, is also showing some incredible data. Hundreds of stocks are trading down 30%, 40% and even more than 80% from their 52-week highs. Most incredibly, there are more stocks in the index down 70% or more from their 52-week highs than there are stocks down less than 10%!
This is the collapse in absurd stock valuation. But there are some fast-growing companies now priced very reasonably, with plenty more to join them, when prices keep falling. There is a lot of fear in this area of the market. But this type of fear is the friend of the rational investor looking to buy undervalued stocks.
Sven Franssen