FLASH FRIDAY: Market Declines, Past and Present

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

Like snowflakes, no two market declines are exactly alike. But some declines are more alike than others. 

It can be argued that the current bear (or at least bearish) market of 2022 “bears” (groan) most similarity to the so-called “tech wreck” of the very early 2000s.

To be sure, one can’t properly compare the full-fledged, drawn-out decline of 20 years ago, which saw the Nasdaq Composite drop an astonishing 77% between March 2020 and October 2002, and the 2022 decline, which is less than two months’ old and has so far trimmed about 15% off the Nasdaq. 

But the underlying conditions are similar: a reasonably functioning economy with no real systemic fault lines, just way-overvalued “story” stocks with no earnings (Internet stocks 20 years ago; SPAC stocks today) that went up way too high, for far too long.      

In February 2001, Traders Magazine published a Q&A with John Myers, Chairman and President of GE Investment Corp. In “Sidestepping the Tech Wreck,” Myers said the $116 billion pension fund managed to beat its equity benchmarks by 3-4 percentage points, partly by getting out of the real dicey stuff, or avoiding it altogether.  

“We were never into the WebVans or any of the large B2C companies,” Myers said at the time. “We just didn’t believe they had a sustainable competitive advantage as a value-added proposition.” 

And there’s also a parallel to the larger, more established tech names, such as Amazon, Nvidia and Tesla – the types of stocks that are down 15-40% this year, but nobody expects will cease to exist.  

“On the other side of the web, the B2B side, however, we recognized that, Hey, this stuff is going to be utilized as “old economy” companies transition themselves into the new era – change the way they go to market,” Myers said. “Many of the companies involved in infrastructure development are changing the old company model. The Ciscos, the Oracles, the Sun Microsystems, the EMCs. So, although we were underweight in technology overall throughout most of the last five years, we were overweight in these companies. But earlier this year, we started to look at valuations, even for the good companies, that were just getting to levels that you couldn’t support.”

Myers explained that the decision making for each trade wasn’t just a top-down edict. “It was also bottom-up from our portfolio managers. When they were developing their models, they had to ask how they could justify holding those stocks. You always have your target price. Once the stocks were through those, the question became, “How long do you hang on?”

After retiring from GE Asset Management in 2006, Myers served as a Director at Legg Mason, and he was also affiliated with Angelo Gordon and ForstmannLeff private equity firms. Myers couldn’t be reached for comment.  

Ultimately, each market downturn is different, but there are also commonalities that can be learned from. Certainly some managers have sidestepped the 2022 market decline, and their stories are yet to be told. But chances are the stories will be similar John Myers’ story from two decades ago.