March 06, 2023

January featured rock-solid market performance, which led people to think the worst is behind us. But that may not be true.

At the end of January, the Nasdaq-100, a stock index that includes the largest non-financial firms on the Nasdaq exchange, was up more than 11%. That was its best January since 2001. And while that seems great, there are plenty of parallels between now and a previous bear market…in and around 2001.

In 2000, the dot-com bubble popped. That year, the Nasdaq-100 finished down 39%. In January 2001, the index gained 10.7%, much like this January. Yet, by the end of 2001, the Nasdaq-100 declined more than 21%, despite its blazing start. Adding further salt in the bulls’ wounds, the index dropped another 31.5% in 2002, marking three straight years of huge losses.

These events crushed investors who “bought the dip,” wiping out many of them. This pattern may be feeling familiar to some because in 2022 the Nasdaq-100 fell 33.1% (not far off 2000’s decline of 39%). And just like in January 2001, the index provided a double-digit gain in the first month of this year.

If the pattern holds, this year’s Nasdaq-100 January surge of 11% is a bad omen, not a sign of encouragement. Also, if 2022 is analogous to 2000, and 2023 resembles 2001 and its early-year tech rally, that implies 2023 could finish like 2001, which was down more than 21%.

Further bad evidence lies in the current setup for stocks, especially tech stocks. The hawkish Federal Reserve, rising interest rates, and likely recession ahead are worse for equities than the market environment at the turn of the century.

So, despite bullish hopes and amplified January returns, the worst may still be ahead.

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