Prepare for a repeat of 2002 - only the pivot is missing

Mikael Syding
20/02/2023 | 4 min read

The US S&P 500 index is 15% below* its maximum level (*closing price February 16, 2023). Is it over now? Can we finally look forward to a soft landing in the economy, appropriately falling inflation and a new steady upward phase for the stock market? The way I see it, it's a completely different thing that's over than the decline in stocks.

Bear markets are created by excessive optimism and unjustified high valuations. When excesses in the stock market are to be rolled back at the same time as the Fed cannot or does not want to stop an incipient recession, the conditions exist for a healthy return to reasonably valued or even cheap stocks. The road there is longer than many realize. After 15 years of stimulus and soaring stock markets, most people are conditioned to buy the dips way too early.

It took e.g. three years for the extreme technology optimism of the late 1990s to normalize. Then the craziness was compared to the Nifty Fifty of the 60s (that you could only buy and keep the best stocks regardless of valuation) and the 1929 madness slogan that stock valuations had reached a "permanently high plateau". Never again could the market be tricked into something like this, people thought at the time. But just 5 years later, an even bigger housing bubble burst, and right after it, a new gigantic technology balloon began to be inflated again. It wouldn't even be possible to make an AI-directed flat Netflix movie on the same theme. The scenario is too unlikely.

Between the 14 months of March 2000 and May 2001, the S&P fell by 15%, just as much as the last 14 months from January 2022 to February 2023. In both cases, the index was first much deeper down, but in a few months it rebounded by just over 20%. The similarities are striking, both in magnitude and the fact that it is extremely highly valued technology stocks that lead the index both in the race and in the rush. Of course, we don't know what the future holds for us, but in the comparison example, the S&P fell a further 42% from May 2001 to the two bottoms in July and October 2002, respectively. It was therefore just as far left in time for the decline, but from a starting point 15% during all time high it was over 40% downside. I think it would count as a so-called "pain trade" for most people. Amazon e.g. fell by 95% from top to bottom. It took less than two years, but for Microsoft the suffering lasted for 9 full years and ended up 75% below the peak.

If the parallel rhymes, there is 40% downside left for just over a year left for the S&P500. It's also pretty close to what would lower the stock market valuation to just slightly above the long historical average (measured as market capitalization relative to GDP or corporate earnings).

The examples dance to the beat so far regarding tech stocks, valuations, initial decline and bounce, and an approaching recession. The only thing missing is for the Fed to pivot and start lowering interest rates. It was when the central bank seriously said that we must alleviate the recession by cutting interest rates that the stock market seriously crashed. The same pattern with dovish pivot => stock crash was also seen in 2008-2009 after the housing bubble.

We have just left the 2022 reporting period behind us. It was not as dangerous as some feared. I and many people with me (it can be seen in the 13F statistics for last autumn) expected that this would happen and may have bought META, Spotify and everything possible before the winter rally.

But now I think that means that it is over. To be clear, the long slump is not over. No, it's just about to enter its brutal second half. The only question is what to own and what not to own for the next 12 months. In 2002, both banks and insurance companies were hit by foreclosures and credit losses. In 2008 it got even worse and the entire financial system could only be saved with a law change that said “We look the other way while you rebuild your capital; in the meantime, you don't need to market the junk you own."

That means one of the few things that won't happen again this time is a banking crisis. This time the banks have a buffer. This means that you can easily buy retail banks in the Nordics. On the other hand, there will be much less money left in the consumer sector after mortgage costs and higher electricity bills. This means that all consumer goods, especially of the type white goods, renovation, fashion clothes, unnecessary gadgets will have it all the more difficult. The central banks are tied for the time being, so count on stocks for everything that is nice-to-have over need-to-have, where banks and oil are absolutely necessary - and still ridiculously cheap. Many so-called technology shares are really not needed, but have mainly lived on the fact that the customers, both small and institutional, had faith in the future and money to spare.

Above all, they are not cheap – Scott McNeely of Sun Microsystems laughed after the crash “How could someone pay 10 times sales for my company? Of course it would crash!”. Well, every other technology company costs 10x sales again after the winter's price doubling. The Nasdaq index thus has an extra large downside. Shopify, Tesla, Lululemon, Monster, DoorDash, Snowflake, Netflix, Docusign - the list is long of companies that may have unsustainable valuation, and in many cases questionable raison d’etres.

Incidentally, as recently as the day before yesterday, a friend’s Tesla S100 had a so-called "whompy wheel", i.e. the wheel axle suddenly broke off when he was going to park. It's a well-known flaw among Tesla analysts. Yesterday, Tesla also finally admitted that 362,000 Teslas have dangerous driver assistance software that needs to be fixed. A car company like that should not deserve 8 times sales in valuation when the norm is max 1 and the competition has increased significantly during the 2020s.

Before the rest of 2023 and into 2024, it could therefore be a good idea to avoid the tech sector, park the money in banks and oil, as well as well-chosen boring and cheap shares or acquisitions. When the relative movements become large, the buyouts usually come in a hailstorm. Regardless of whether or not the deals come through, the climate is good for medium-sized companies with focused business models. I like e.g. Elekta, SSAB, Austevoll and Kindred on the Nordic market. Further afield maybe Capri (Versace).

You might still want to ride the climb just a little bit more. By all means do it in well-chosen stocks, but hedge the downside with various index products and be prepared to hit the sell button when the dreaded pivot arrives, i.e. interest rate cuts that confirm the severity of the economic downturn.

Not: I USD. Historical returns are not a reliable indicator of future returns
Not: I USD. Historical returns are not a reliable indicator of future returns


This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.