It's not about Russia and Ukraine. Or at least, the latest rollover in the major stock indexes isn't mostly about the Ukraine story, which in the mode of most geopolitical threats is more a psychological shadow over markets and yet another excuse for investors to resist taking on more risk despite lower prices almost across the board. Wall Street is contending with the persistence of the known macro pressure points (Fed urgency to raise rates, decelerating profit growth, elevated inflation) occurring alongside the unceasing liquidation of the entire high-hope/low-profit precinct of the technology sector. Jeff deGraaf of Renaissance Macro says, "If the weakness is geopolitical, that's good news, because it's usually resolved." See Crimea, Syria and plenty of other instances of regional conflicts that were only a passing hindrance to markets. "But what if political tensions are an excuse, the way hanging chads and lack of election certification were in 2000? It wasn't politics, it was a post-bubble environment," he says. As the damage piles up — mostly in those parts of the market where the froth peaked a year ago— the debate now hinges on whether the S & P 500's ability to hold a bit above the January lows represents an impressive show of resilience or delusional delaying of the inevitable. And that damage, let's be clear, is stacked pretty high. A third of the Nasdaq 100 is off at least 30% from a high, while half of the S & P 500 has fallen 15% or more. The median biotech stock was recently of 60%. The Global X Cloud Computing ETF (CLOU) has shed 36% and has disgorged most, but not quite all, of its pandemic gains. SPACs as a group, have had their trading value cut in half in a year, based on the Defiance Next Gen SPAC ETF (SPAK) . ARK Innovation (ARKK ) has done a bit worse than that since peaking a year ago. Stealth bear market? About a month ago here , I floated the 2000 experience as an intrusive analogy rather than a prediction, but the echoes remain: "There's a nagging thought shared by those who were around for the late-'90s tech boom and bust that a somewhat tamer version has been underway, the New Era bullish arguments and the rampant IPO speculation and software and Internet stocks valued on vaporous hopes for corralling a huge digital market. The bust back then ravaged the marginal, newly public stocks, then eventually reached the undisputed winners of the Nasdaq. Those companies (Microsoft, Intel, Cisco) kept growing nicely but once momentum broke and money was rationed with an eye toward valuation, the stocks went down relentlessly over more than two years." For the smaller, less-mature, busted boomtime tech stocks back then, abandonment by investors was the eventual fate. By 2002, many dozens of bubble-era companies were valued below the cash they held on their books. As for the current market, a certain type of market handicapper has begun to say, "Stop wondering if a bear market will emerge – one has been underway for months." This was the talk, too, into early 2016, a period I've cited before as resembling this one, with the start of a long-feared Fed rate-hiking cycle and earnings-growth sputtering. A stealth bear market vs. a complex correction is likely a distinction without too much of a difference, ultimately. In early 2016, the S & P ultimately clicked briefly to a 15% peak-to-trough decline, the Federal Reserve throttled back on tightening expectations and a base was set for another push higher. A 15% drop from the recent Jan. 3 record high would take the S & P toward 4100, levels first reached last April. That would be no disaster in itself, and it's also not clear it will go that way. First there would have be another visit to the Jan. 24 intraday low of 4222 in the S & P 500. Since that date, the market has priced in one to two additional Fed rate hikes this year, crude oil is up 10%, the fourth-biggest stock in the S & P 500 (Meta Platforms) imploded and, yes, Russia has massed troops on the Ukraine border. With it all, the equal-weighted S & P 500 is less than 7% off its peak. Is most of the selling over? What traders tend to look for in a successful retest (or slight undershoot of the prior low) is less-intense selling at the low (fewer individual stocks making new lows, a lower peak in the Volatiltiy Index, etc.) and then a sufficiently broad bounce from there. Investor sentiment can be tricky, but it would seem to be negative enough to give pause to anyone looking to bet on quick, deep and lasting downside from here. Eventually, the kind of pessimism seen in AAII retail investor survey here tends to precede firmer markets over subsequent months. Note the bull/bear ratio is now back to lows from that early-2016 period It should be said, though, that retail investor flows into equity funds have continued at a pretty healthy pace, so we can't yet say a full retreat from stocks has followed the darkening of their mood. Still, the National Association of Active Investment Managers equity-exposure index, at 53% last week, has only once been lower since the March 2020 market bottom (in May of last year). In Bank of America's global fund manager survey, professional investors reported their lowest relative allocation to technology since 2006 and their highest combined weighting in "late cyclical" sectors (banks, energy and materials) in the 17-year history of the survey. And, more anecdotally: Has the mocking and jeering of celebrity growth-stock investor Cathie Wood of ARK Invest grown as intense and universal as the glorification of her was in early 2021? Clearly the market has undergone a change of character: Last year the S & P 500's deepest pullbacks were 5-6% and so brief the dips were tough to buy. We've now spent an entire month more than 5% below the record high and prices keep churning lower as they hunt for buyers with conviction. As untrustworthy as the market technical setup might seem and as much as the bulls now have to prove, and as savagely bifurcated the market has become, some bigger-picture factors are worth noticing. This past week was an options-expiration week, which have been pretty consistently poor for stocks, the S & P lower some three-quarters of the time over the past year and a half or so. Earnings growth is about to slow quite a bit, but forecasts for 2022 continue to hold up, reaching further records. Bespoke Investment Group notes that when forward earnings are at a record, the S & P 500 tends to work higher over a period of months. The S & P 500 is now down almost 10% year to date. It's quite common for the index to suffer an intra-year setback of this magnitude or more. Yet it's fairly uncommon, historically, for the full year to finish down that much in the absence of a U.S. recession, which seems quit unlikely at this point. This is all context rather than catalyst. None of it will solve the Ukraine standoff, brighten investors' foul mood or quickly fix busted growth stocks. But a bit of perspective can only help in a market now fixated more on short-term risk than long-term reward.
Traders on the floor of the NYSE, Feb. 18, 2022.
It's not about Russia and Ukraine.