Almost 10% of S&P 500 is down over the past three years
Yesterday we looked at technology companies with large setbacks, but it got us to go deeper and the equity destruction is quite big when you broaden the lens. In the S&P 500 there are now 43 companies with a drawdown larger than 30% over the past 200 days and that are down on a total return basis over the past three years. As the table below shows there are some quite big names on that list such as Walt Disney, Comcast, Citigroup, PayPal, Starbucks, General Electric, Netflix, Boeing, Ecolab, and Illumina.As long as financial conditions and interest rates move higher we remain defensive on equities and will continue to argue that investors need commodities to balance their portfolios. We have described in several equity notes that the period 1968-1982 was very bad for equities in real terms due to inflation. Time will tell whether we get an equally long period with zero real rate returns for equities, given the factors such as urbanization, green transformation (ESG), decade of underinvestment in the physical world, and deglobalization of supply chains to pandemic and lately Chinese Covid-lockdowns, inflation will remain high (3-5%). Forces the cost of capital higher and thus equity valuations down. While US equities have still delivered 40% real return since early 2019 the real returns are eroding fast at these inflation levels. Today’s core CPI m/m print at 0.6% is suggesting inflation will remain elevated for quite some time eating into returns. For bonds the situation looks even more grim (see chart below) and investors are basically losing out on everything except for cash and commodities.