Anyone who has participated long enough in the stock market may be reminded of 2008 by how it has performed so far this year. When the market crash caused by the financial crisis was still nurturing, the S&P 500 experienced two drops of over 2% in the first 10 days of trading.
In the first three weeks of 2022, the S&P 500 has dropped more than 7%, while the Nasdaq Composite Index has fallen more than 11%.
From a historical perspective, the chart below shows where the market is currently compared with all the January stock markets since 2000. January 2022 is highlighted in red.
When looking at the years that began with similar brutal drops, I get an ominous feeling. These years are 2000, 2003, 2008 and 2009, all of which are associated with the biggest market crashes over the past several decades.
If we take a longer view of those four years, they are actually not all that bad, as illustrated in the chart below.
Among those four years, 2003 and 2009 ended with more than 20% gains for the entire year, while 2000 and 2008 ended with losses.
So what does that mean for 2022?
If we look more closely at the valuation, 2022 will probably be more like 2000 and 2008. Leading up to these years, the stock market had a good run while valuations were at cyclical high, just as it was a little over a month ago. The 2003 and 2009 markets were just the opposite, experiencing huge losses and the valuations were near cyclical lows.
Even in 2003 and 2009, the market had some rough times. In 2003, the S&P 500 dropped another 12% to reach the bear market bottom before starting its bull run. In 2009, it crashed another 26%.
Value and growth stocks have also behaved very differently than in the recent past. Value stocks have drastically underperformed over the past six years, but have done vastly better than growth stocks so far this year, as indicated by the relative performances of the Russell 1000 Growth Index and Russell 1000 Value Index.
So it may be time for value to shine again.
With valuations still near an all-time high and the Federal Reserve tightening its monetary policy, the January stock market so far indicates a rough year ahead. The best bets in these market conditions are companies with strong balance sheets and high profitability at reasonable valuations.
There will also be more opportunities. In the meantime, buckle up!
