This is When the Stock Market Will Bottom
Updated: Sep 19
Anyone who is paying attention knows that the stock market has depreciated year to date, and the majority of people who bought stocks in the past few years have significant losses. It can be frustrating buying what you believe is a discount in stock prices only for stock prices to eventually continue to lower as inflationary concerns persist and recessions around the world potentially worsen.
The question on everyone’s mind is when will the ultimate bottom in stock prices be? When will the stock market rebound and the next sustained bull market begin? While stock market bottoms can be impossible to predict and cannot be confirmed until months or years after, we can use history to have some sort of idea of when certain stocks will reach their lowest valuations.
Not all types of companies and stocks in the market are equal, and we will see different segments of the stock market bottom out at different times. The S&P 500 represents the largest and most liquid stocks in the economy, and the stocks of these mature companies historically will be the last to reach their lowest in this recession. This article will focus on the more speculative, high-growth technology companies of the stock market with lower market capitalizations.
These speculative, high-growth technology companies will bottom long before the S&P 500. Typically, some of the fastest growing companies in the economy belong to early, nascent industries that have years and decades of massive, potential growth ahead of them, or threaten to disrupt and innovate matured industries.
Examples of these include the company Upstart whose mission is to use artificial intelligence to challenge FICO credit scores, or the company Lemonade who also uses artificial intelligence to disrupt traditional, centuries old insurance companies. Other examples are Chargepoint, which is the leader in electric vehicle charging stations and Teladoc, which is a leader in virtual healthcare; both the electric vehicle and virtual healthcare industries are young and have reached a very small fraction of their total addressable markets.
The stock holdings of the Ark Innovation ETFs (ticker symbols ARKK, ARKW, ARKF, ARKQ, and ARKG) are arguably the best list of some of the more promising innovative disruptors. All of these stocks are early in their growth stories and are smaller, less mature companies that tend to experience greater effects from economic downturns and recessions compared with the businesses that make up the S&P 500. These innovative companies will undoubtedly be the first stocks that investors sell and capitulate on first during stock market crashes when there is a flight to safety.
To illustrate the point, let’s look at Apple, Google, and Amazon stocks during the dot.com bubble of the early 2000s and the financial crisis of 2008. While Apple, Google, and Amazon are some of the largest, most successful companies of the world today, during the dot.com bubble, the internet was a much more speculative technology that was early and decades away from maturity. Even by the late 2000s, while it might have been clear to most people of the potential of the internet, it was far from certain that these companies would grow to be the companies we know today as integral to our daily lives.
Many people were skeptical of the safety of shopping online around 2008. Around the same time, the iPhone first hit store shelves. There was still a lot of speculation regarding the success of these companies. During the dot.com bubble, the S&P 500 bottomed around September 2002, while Apple bottomed in December of 2000 and Amazon bottomed in September 2001. During the financial crisis, the S&P reached its lowest around March 2009, while Apple, Google, Amazon, and Netflix hit their bottoms in November 2008.
The point is that early, high-growth, more speculative tech companies such as these reach their lowest prices up to a year or more before broad index funds like the S&P 500.
It seems as though the stock market will not rebound to new, all-time highs and enter a sustained bull market until inflation rates show a clear, downturn trend over several months and the federal reserve eases its interest rate hikes.
It’s impossible to know for certain when the stock market will reach its bottom from a macro-economic perspective, however, the best opportunities in innovation and future technology giants will have long passed by that point.
The stock market is forward-looking, so the S&P 500 and Nasdaq Index funds will most likely reach their lows before the worst of this recession, similar to how the indexes bottomed in March 2009, but the recession and its aftermath continued for some time after that.
The historical P/E (price to earnings) ratio is around 15 for the S&P 500 index and currently the ratio is anywhere from 20 to 25 over the past few weeks (at the time of this writing). This means that we can expect the S&P 500 index to continue to fall over the next year; we are still not quite near the bottom in the broad indexes.
However, if you expect the stock market to bottom out next year or in 2024, then it will soon be time to buy your highest conviction stocks from speculative and disruptive companies.
Many of the companies that may fit this criteria such as the Upstart, Lemonade, and Teladoc examples above and countless others in the same category are currently 70-80% or more down for their all-time high prices in 2021. Most of these companies are trading at levels not seen since before the coronavirus pandemic, completely wiping out the gains of the stimulus bubble of 2020.
Thus far in 2022, some of the lowest prices were recorded in the month of June, where many stocks in the market reached their 52-week lows, and it is unclear if the market will continue to lower lows in the future. It’s possible that June was already the bottom for speculative, high-growth technology companies, but I am convinced that if the bottom for this segment of the stock market has not already occurred, then it will be fast approaching.
Some of these risky, promising, beaten-up stocks will not survive this recession. It is important to do your due diligence when buying any stock. However, there will be a handful that will emerge from this crisis to produce generational wealth such as Apple, Google, and Amazon. If you have not been buying these innovative, disruptive stocks at these discounts, or do not soon, there’s a great chance that you will miss the bottom and a generational wealth opportunity. Do not miss out.