Bear market turns 2
Bear birthday party Nasdaq Helsinki has been in a bear market for almost two years. To mark this dubious anniversary, What’s Up with Stonks is hosting a bear birthday party. In this post, we talk about the bear market, what you can learn from it and what to do with stocks now.
The stock market's general index peaked on September 6, 2021. The stock market has fallen by around 27% from its peaks. The return index of Nasdaq Helsinki that accounts for dividends is down -20%.
Let's reflect a little on what we can learn from the fall so far and how to navigate forward. Unfortunately, many investors get excited about stocks only after they have been going up for a while. Similarly, the mood among investors is now palpably subdued. As counter-intuitive as it might sound, investing is at its best when it feels downright repulsive. Investors tend to succumb to this kind of self-loathing sandpit wallowing in a bear market.
In the fall of 2021, the mood was different. Investors were willing to invest in any kind of business at any price. Nasdaq Helsinki saw an influx of IPOs. There were many companies whose business model or product performance hadn’t even been proven. And many of those companies still haven’t done so, by the way.
The financial crisis caused by the COVID pandemic and the rapid 30% plunge in stocks at the time did not serve as a lesson to investors that stocks can fall sharply if something unexpected and negative happens that has not yet been factored into companies' future cash flows. No, the COVID pandemic taught investors how quickly even sharp dips can lead to new highs. Every dip is a place to buy, “BTFD”! In addition, the economic environment during the pandemic was initially thought to be somehow difficult, which it certainly was for, e.g., the restaurant and travel sectors. However, in other sectors, the super-stimulus of governments and the inflating purchasing power of citizens made the business environment artificially easy. This again led investors to overestimate the true quality of the business operations of listed companies.
The market situation was also the subject of a number of comments in these posts in the summer and fall of 2021. In August, I pointed out that the world's main stock index, the S&P 500, had not seen even a 5% correction in over ten months and instead of saying “read analysis and make good stock picks”, I called for good stock sales. The idea behind this was that most listed companies do not make a meaningful return for investors in the long run, which is why the skill of selling should be developed by the investor.
In October, I mentioned how there was talk about investing in the most generic Finnish soap opera (Salatut Elämät). Now that should’ve been a warning sign for everyone at the latest.
Later in the fall, I brought up comments from a portfolio manager who dismissed talk of a stock market bubble as whine of boomers who don't get technology. Metaverse became a hype word, much like generative AI is now. Investor legend Charlie Munger insulted the market as being crazier than it was in the tech-bubble.
In December, I published a video titled “Buying at the top of the bubble”, which has the most apt of titles and thumbnails.
All in all, there were plenty of warning signs that the party was going to go on for a couple of punch bowls too long. On top of that, the valuation of shares was getting on nerves.
How long and deep has the current bear market been compared to previous ones? In general, a bear market is defined as a fall of more than 20% from the peaks. In the 21st century, the Helsinki Stock Exchange has been hammered hard. The bursting of the IT bubble took 74% of the stock market's value and the bottom was met after more than three years of decline. The stock market that had risen to a super-cycle reacted to the financial crisis intensively, falling 68% over 1.5 years. In the European debt crisis, the decline was at least more gradual, and the bottom was met a year and a half later. We can’t know in advance whether the bottom of the current bear market is already in hand, or whether it was Monday August 21 last week, but compared to its sharp peers in the 21st century, the current decline has been long in time, though not so aggressive.
As a curiosity, sales of champagne in Finland peaked in July 2021 and have been falling for two years. The stock market and the consumption of champagne seem, at least visually, to have a connection.
Back to the actual topic.
As per usual, there are many stories beneath the surface of the general index. Among the people’s champions, Neste was already at the peak of its bubble in January 2021 as part of the global renewable energy bubble. In contrast, Nordea, Finns' favorite stock, peaked only this spring. Another dividend payer, Sampo, has returned capital to its owners with such a roar that I don't think Sampo's owners even heard about the whole down market with all the dividend money ka-ching. Both Nordea and Sampo have benefited significantly from rising interest rates, while many other stocks have been punished by them. It’s good to remember that in every down market there are winners, where money grows. Among the pariahs of today are the winners of the next market.
Although the general index has only lost about a quarter of its value, there have been many companies in the down market where capital has been virtually wiped out if the stock has been bought at the peak. The Nasdaq Helsinki Small Companies Index is down 44% from its peak in summer 2021. Many former star stocks such as Harvia and Qt have lost up to 70% of their value in less than two years.
The trudge of Nasdaq Helsinki can be compared to the world's main stock exchange in the United States. The average bear market in the US has lasted less than a year. Bear markets tend to be shorter and more volatile than bull markets. However, Nasdaq Helsinki tends to dip a little longer.
The weakness of Nasdaq Helsinki is that practically all the bad news about the global economy is splashed here. We have a lot of companies that manufacture investment goods on the stock exchange. When uncertainty grips the sector, global investment tends to stall. The purchasing power of Finns has been hit hard by inflation, which hits demand from domestic companies such as Kesko. To make matters worse, in global scale, the Finnish stock exchange is a peripheral one, from which foreign money is the first to flee when the clouds darken.
What lessons can the bear market of the last couple of years in this inflation storm offer? First, unpredictable things happen in the stock market and in the world. Therefore, buying shares when they are priced to perfection is dangerous. In a way, this is ridiculously obvious, but it tends to be forgotten in the heat of the moment.
IPO booms are a reasonably obvious warning sign for the investor. Most companies have an IPO when there is demand for them. The financial industry will tear anything to the stock market if investors are prepared to pay something for it. And investors love all sorts of stories when the market booms. There are always gems among the IPOs. But for every Kempower, there are a bunch of Lifa Airs, Modulights, Fifaxes, Betolars and similar where things don't rock and roll as advertised in the IPO prospectus.
It’s often said that shares are a good hedge against inflation. I think the last couple of years have taught me that stocks are not a good hedge when inflation takes you by surprise. In fact, cash, even with its waning purchasing power, would have been the best investment. Cash can be used to buy cheapened shares after a new inflation and interest rate environment has been priced into the shares. And for most stocks, except perhaps banks and insurance companies, the new environment means a leaner valuation.
Finally, you can consider whether now is a good time to buy. As I have repeated in many of these posts, Nasdaq Helsinki has a favorable valuation level. Much of what warned of a bubble in 2021 is now gone. There are no IPOs in sight. The difficult operating environment has dulled investors' perception of the quality of listed companies and forecasts have been downgraded. More surprises can always happen, but inflation, rising interest rates or a recession should no longer really be a surprise.
Nasdaq Helsinki is an investment-driven stock exchange, as I mentioned. According to the latest calculations by Helsingin Sanomat, up to EUR 140 billion worth of green investments are planned for Finland over the next decades. Although many of these won’t materialize, this illustrates well what kind of boom is planned in Finland alone, at least on paper. And the problem of climate change is global. Many companies on Nasdaq Helsinki are good at solving problems in the physical world, which is what climate change is.
If the global economy cools down further there will be more good buying opportunities on Nasdaq Helsinki, but now is indeed a good time to invest. In the long run, the Helsinki Stock Exchange has been one of the best in the world, even if you don't want to believe it now. Every dog has its day.
Thank you for reading the post! Read analysis and make good stock picks!