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THE S&P 500 IS DOWN 10% so far this year—but the pain hasn’t been dished out evenly. Value and steady dividend-paying stocks are about flat for 2022, while technology companies and speculative small-cap stocks have suffered mightily. Money has fled the market’s unprofitable glamor companies and flocked to old-fashioned cash flow generators.
Just how bad has the drubbing been among formerly hot growth names? Look no further than Cathie Wood’s ARK Innovation ETF (symbol: ARKK). Over the past year, this actively managed exchange-traded fund (ETF) is down a whopping 57%. The losses piled up starting early November 2021—arguably the peak for growth stocks and small-cap shares. ARK Innovation ETF fell more than 20% during 2021’s final two months.
After that significant late-year dip, the fund has slumped another 45% this year, bringing its total drawdown to 67% since the fund’s all-time high notched in February 2021. Given the way investment compounding works, the fund must now soar some 200% just to get back to even. The growth-stock part of the stock market is clearly in a bear market. Just how bad have some of the drops been among ARK Innovation’s biggest holdings? Brace yourself.
Morningstar is my favorite site for analyzing ETFs. I like to see what’s under the hood of popular funds. According to the April 21 snapshot, Tesla (TSLA) is ARK Innovation’s biggest position, with a nearly 11% weighting. The stock has performed spectacularly over the past year, up 40%. But among the fund’s largest holdings, that’s the only happy story.
Zoom Video (ZM) is the second-biggest holding. That work-from-home story stock has fallen 69% over the past 12 months. Roku (ROKU), ARK’s third-largest position, is down 72% from a year ago, while its fourth-largest holding—Teladoc Health (TDOC)—is off 68%. All these stocks were among the fund’s top 10 holdings a year ago. I could go on—or you can check out the dreadful performances for yourself. After such a rough stretch, the fund’s assets under management fell below $10 billion after peaking near $28 billion 14 months ago. But here’s perhaps the biggest surprise: Money has continued to pour into ARK Innovation ETF.
This is not intended to be another hit piece on Wood’s flagship fund. Rather, it illustrates the old cliché—that it isn’t a stock market, but a market of stocks. Even as the broad U.S. market has held its own over the past year, many once-sexy stocks have been tossed into the dumpster.
Looking at it through data analytics, one of the most favorable periods for the market begins in July 2022. Since 1934, stocks, especially “Large value”, have produced positive returns in 18 out of 22 periods over the 48 months starting July of the 2nd “Presidential term cycle” year – the best 48 month period of the 4 year cycle
Table 2 https://tinyurl.com/4kjzczcr
Further, when the market produced a greater than minus -10% drawdown at some point in the “1st half” of the midterm Presidential year, stocks, especially “value”, have done well in the forward 48+ months ( Tables 4 & 5 ). The first -10% correction already occurred in February 2022.
Yes, the tech stocks have fallen. Rising interest rates have decreased the value of future, uncertain earnings. But if interest rates keep rising, then the value of present earnings will be hit as well. When that happens, the blue-chip dividend-paying value stocks will decline.
My personal portfolio has done well, but I can see that many of my stocks are overpriced for what they are. Utilities at 20 times trailing earnings, with a dividend of 3%, are not typical of a normal market. Eventually, there will be a correction, and everything will go down 20-30%.
Great information Mike. These kind of stories are probably why I stick to simple, boring indexing and holding through long periods.
Thanks, Rick! I was surprised to see some of the big declines in like MSFT and GOOGL – bear markets there too.