September 29, 2022


Skillful Business Crafters

2021 Year in Review: A Very Good Market for Mega-Cap Stocks… But Not Much Else

We will soon be seeing numerous news stories about how the stock market had a fantastic year. These stories will cite a 30{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} gain in the S&P 500 and the Nasdaq 100 and a 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} gain in the DJIA. Stocks such as Apple (AAPL) , which is up around 40{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, will be offered as examples of what a fine year it has been.

These sorts of returns are great news for portfolios that are tied to the performance of big-caps and the senior indexes. Many retirement and 401(k) accounts have allocation options that benefited greatly from this strong performance.

However, the big story this year isn’t how well the indexes have performed —  it’s how much they failed to reflect what was really going on in the broader market. Just 10 stocks are around 30{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of the weight of the S&P 500, and 25 stocks are close to half. These stocks did well, and therefore the indexes did very well.

The indexes are essentially a specific asset class of very large-cap stocks, and that asset class had a very good year. If we dig deeper, though, the picture is not quite as attractive.

If you look only at stocks that are trading under $20 then 50{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} are down 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} or more from highs. 63{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of stocks under $10 are down 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} or more.

— James DePorre (@RevShark) December 29, 2021

One of the easiest ways to see how the indexes have overstated the performance of the broader market is to look at returns produced by U.S. equity funds. According to TheStreet, close to 85{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} were trailing the S&P 500 as of the end of November, and that had probably declined in December when secondary stocks were hit hard once again. On Tuesday Goldman Sachs stated, “if you take the year-to-date total return of the Goldman Sachs Hedge Fund VIP basket and you triple it, you still fall short of the S&P 500.”

Another illustration of how poor the market has been for stocks other than mega-caps is that nearly 60{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of all stocks are below their 200-day simple moving average of price.

The generally accepted definition of a bear market is when a stock is 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} below its highs. Currently, 3,616 stocks out of a total of 8,433 are in a bear market. That is 42.9{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of all stocks, yet the indexes are currently close to all-time highs.

There are a tremendous number of stats that illustrate the two-tiered nature of the market in 2021, but they will garner little attention because the indexes are the easy headline and they appeal to most of the financial media and traditional Wall Street.

The generally accepted definition of a bear market is when a stock is 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} below its highs. Currently, 3,616 stocks out of a total of 8,433 are in a bear market.

For the majority of stocks, the market topped in February and has fallen into bear markets over the last nine months. A frenzy of social media trading marked the February top when stocks such as GameStop (GME) and AMC Entertainment (AMC) were pushed higher due in part to short-squeezes as well as the coordinated traders on Reddit and in Discord chat rooms.

These traders continued to aggressively push various trades, mostly in small-caps and thinly traded stocks, but the ability to create sustained movement quickly diminished, and those that had been promoting the holding of stocks with “diamond hands” eventually gave up.

This dynamic and the loss of many newer and small traders who were using stimulus money to trade was part of what hurt many of the secondary stocks and small-caps, but another major issue this year was the flood of special purpose acquisition companies or SPACs.

In 2021, more than 600 SPACs IPO’ed and raised over $160 billion in capital. Many of these SPACs had less than stellar fundamentals, but they attracted speculators that were protected by the $10 redemption. It was easy to sponsor and sell a SPAC at $10 if it could be redeemed at that same price at some point.

A significant number of SPACs are trading at their lows and have taken capital from other speculative sectors.

There are more than 570 SPACs still looking for a deal, and around 90 have already been liquidated. Even when a SPAC has found a deal, many have traded very poorly as the $10 redemption price disappears and those that are holding PIPE shares try to recover some capital.

SPACs sucked up a tremendous amount of capital during the year, and their poor performance is a big part of why so many smaller stocks have acted poorly as well. Not only are there are a significant number of SPACs that are trading at their lows, but they have taken capital from other speculative sectors.

Two sectors that have suffered greatly from this lack of liquidity in 2021 are biotechnology and cannabis. Both are trading close to their lows and have substantial losses for the year. Overall there are around 2,700 stocks or 32{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of all stocks, within 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} of their 12-month lows.

Be prepared for the stories about how well the market did this year, but the truth is that there is one asset class that did very well, and that is mega-cap stocks. The broader market had a very tough go of it in 2021, but you would not know it unless you did some digging.

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