in ASX we saw many bubbles burst and when they ended
1) end 2017- cannabis sector
2) early 2018 - junior small and microcap techs
3) Q4 2020- gold and silver stocks
4) end 2020- biotech stocks
5) early 2021- Buy Now Pay Later (BNPL) stocks
6) end 2022- coal stocks
7) Q3 2023- oil stocks
8) Q4 2023-early 2024 - lithium
...if I am not wrong, in each of those sectors which were darling sectors at the time, market participants and Buy and Hold shareholders would swear that they could see prosperity running into many years, premised on industry transformative growth or supply constraints etc. Except that in each of the cases, they end (well before their expectations) and when they end, their fall have been brutal, especially at the low and micro cap space. Of all however, lithium sector was the most enduring lasting more than 2 years and one in which market participants contend that it hasn't ended. Market participants fail to see that when these sector stocks rally hard, they did so based on unbridled optimism and exuberance and when the growth narrative starts changing, their stock prices fall to reflect changing (for the worse) growth assumptions and they can do so even while their underlying commodity prices may not necessarily have fallen as hard (example: gold and oil).
...we should recognise that each and every case rides on a thematic growth narrative and they end when the assumed growth is no longer being delivered. And it does not matter how good the stock and its management are, they undergo price premium compression.
...for this reason, this thread has consistently cautioned about Buy and Hold. Because when you Buy and Hold a darling sector, once its flame starts to flicker, it loses its allure and could become the villain of tomorrow. And we know that sentiment people had about BNPL, right?
....ROTATION! ROTATION! ROTATION! Can't fall in love with a sector/stock. And yes, the current AI mania rally would also run its course.
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The most challenging financial event for investors in the coming decade will be the repricing of securities to valuations that imply adequate long-term returns, following more than a decade of reckless and intentional Fed-induced yield-seeking speculation. Measured from the recent bubble peak, the likely consequence will be a long, interesting, 10-20 year trip to nowhere for the S&P 500. There’s also a strong possibility of an interim loss in the S&P 500 in the range of 50-70% over the completion of this market cycle, or as we observed between 2000-2009, a sequence of cyclical lows punctuated by several extended recoveries. I expect S&P 500 total returns to be negative, on average, for well over a decade – an outcome I also projected at the 2000 market peak.
Meanwhile, be careful not to interpret valuations as near-term market forecasts. That’s not how valuations work. The main thing that determines whether an overvalued market continues to advance, or drops like a rock instead, is whether investor psychology is inclined toward speculation or risk-aversion. The most severe market losses tend to emerge when elevated valuations are joined by deterioration and divergence in market internals, suggesting risk-aversion among investors. Conversely, the strongest opportunities tend to emerge when a material retreat in valuations is joined by broad uniformity in market internals, suggesting speculative psychology among investors.” – John P. Hussman, Ph.D., Repricing a Market Priced for Zero, April 29, 2022
