What’s Behind the Collapse of so Many Stocks since Feb 2021?

by Wolf Richter, Wolf Street:

This crash beneath the surface showed something had broken, that the magic had died, that hype and hoopla were suddenly unable to carry the day.

Stocks have been in a downward spiral for a while. The S&P 500 Index has dropped 23% from its high on January 3rd, the Nasdaq has dropped 33% from its high on November 22.

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But here is the thing: many, and I mean a whole bunch of the biggest high-flyers peaked in February 2021, so about nine months before the Nasdaq peaked, and they have since then collapsed by 70%, 80%, and even over 90%. And it happened very fast, stock by stock. These stocks started getting totally crushed nine months before the Nasdaq headed south.

They include many big-name stocks that have crashed 70%, 80%, or 90% since February 2021.

What many of these companies have in common is that they’re losing lots of money, still, after many years in business. There are a handful in this group that are making money, but most are losing a running ton of money, and by now, many of them have started laying off staff.

Another thing they all had in common is that these stocks reached ridiculous peaks, mind-boggling peaks where any rational human would look at that and say, this crap is in a ridiculous bubble. They were hyped to the nth degree by Wall Street and everyone. And I’ve been calling them the hype-and-hoopla stocks.

On that long list of stocks that peaked in February 2021, and that since then have plunged 70%, 80% or even over 90% are Uber, Spotify, Snap, Pinterest, Zillow, Redfin, Opendoor, MicroStrategy, Twilio, AMC Theaters, Chewy, Virgin Galactic, educational platform Chegg, auto insurer Metromile.

Metromile had gone public via SPAC in February 2021, and that was the high, and it has imploded by 96% since then.

Zoom Video is in this group. It’s down 76% from its ridiculous peak in February 2021. But it’s one of the few companies on this list that made some money.

A bunch of EV makers that had just gone public via merger with a SPAC or via an IPO are on this list, including Lordstown, Workhorse, Faraday Future, and Lucid Motors. They got massacred since their high in February 2021.

Cathie Wood’s Ark Innovation ETF, which tracks a bunch of these hype-and-hoopla stocks, also peaked in February 2021, and has since then crashed 76%.

The Renaissance IPO ETF, which tracks stocks that had their IPOs over the past couple of years, also peaked in February 2021 and has since then crashed 63%.

The Cannabis ETF and the AdvisorShares Pure US Cannabis ETF, both peaked in February 2021 and have since crashed by 87% and by 79% respectively.

By March 3, 2021, 10 months before the S&P 500 Index peaked, this bloodletting beneath the surface that had kicked off in February 2021, was becoming so brutal and so obvious that it gave rise to my first article on this phenomenon. I titled it: “Was That the IPO Stocks Bubble that Just Popped?” I wrote at the time: “When there are suddenly second thoughts in this market powered by so much blind and crazy exuberance, the entire foundation begins to wobble.”

By April 20, 2021, when the EV startup stocks were blowing up, I wrote an article that I titled, “the EV SPAC Hype Boom is Imploding Spectacularly,” and that these stocks were “getting massacred on the edge of the stock market.”

By May 11, 2021, this was getting so obvious that I wrote an article, with the title, “The Most Hyped Corners of the Stock Market Come Unglued.”

And this occurred while all the major indices were still lumbering from new high to new high, driven by the biggest stocks, and while the Federal Reserve was still printing money hand over fist, and while inflation had started to surge.

But this crash under the surface was an indication that something had broken, that the magic had died, that hype and hoopla were suddenly unable to carry the day, that enough investors were bailing out and were dumping this stuff into the laps of the hype-and-hoopla dip buyers; many then got their faces ripped off. And it was a sign that the Big S was starting to hit the fan.

So what happened around February 2021 that caused investors to dump those stocks and abandon them?

Inflation was suddenly surging, while the Federal Reserve was still printing money hand-over-fist and was still repressing interest rates, and while the third round of stimulus checks were getting set up to be sent out in March. And all these inflation issues were vigorously brushed off by the Federal Reserve, by the media, by economists, and most vigorously by hype-and-hoopla Wall Street.

In February 2021, CPI inflation jumped by 0.44% from January. That’s an annual rate of 5.5%. And it came after some big increases in the prior months. In March 2021, CPI inflation spiked by 0.64% from February, which is an annual rate of close to 8%. These were suddenly huge month-to-month inflation numbers, and the Federal Reserve was brushing them off as transitory, essentially telling everyone that it was going to let inflation rip because it would go away on its own.

But even before these CPI numbers were released, consumer prices were rising in all kinds of things that had nothing to do with commodities, such as used cars, new cars, and rents, and other services. And everyone knew that once the stimulus money would reach consumers, they’d spend much of it, and would thereby push up prices further. And investors who chose to see it – investors who weren’t participating in the consensual hallucination – could see it.

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