The trading week was turbulent. The throttling of the flood of money, inflation and the energy crisis are making things difficult for the stock market traders. But if Netflix grows less after all the exaggerations we’ve seen in the stock market, that can only bode well.
The stock markets have collapsed since the beginning of the year, by up to ten percent, and that’s also a good sign. Yes, it also gives hope. If you are now asking whether an unrecognized mutant has just nested in my cerebrum: let me explain the thought briefly.
The stock markets have been more turbulent for a few weeks, with tech stocks in particular collapsing, all of which had been going so wonderfully and madly. Apple, just worth three trillion, suddenly “only” 2.6 trillion. Netflix, Microsoft, Amazon, Meta, Alphabet, the whole Nasdaq 100 – down. The Dax too, the S&P 500 too. There are always small rallies, including this week, but the money is being reallocated, out of stocks and into higher-yielding bonds.
The justifications come in staccato: the Ukraine crisis, of course, the high inflation and the associated “fear of interest rates”. At least one path and corridor was shown to these fears on Wednesday: The US Federal Reserve wants to raise interest rates from March. Fed Chair Jerome Powell’s words were loud and clear. He even left open the possibility of raising interest rates at the next meetings, which take place about every six weeks. What the Fed hasn’t done since 2006. Fed exit navigation in 2022 will certainly not be easy, nor will navigating an omicron wall.
With the exception of the Ukraine crisis, all of these corrections are signs of normalization. Yes, you could say that the markets are anticipating and playing out a life that we have been hoping for for the past two years. In addition, it was always clear that we would have to leave the world of limitlessly cheap money one day. In other words, if Netflix grows less and people stare at the marathon, we might be more outside or in the cinema again. And if central banks don’t smuggle billions in government bonds onto their balance sheets every month, that might not be so bad either.
Exaggerations and huge bets
The stock markets had not only recovered since the crash in March 2020, some prices had climbed, others had literally exploded. This happened under a few premises: First, that the world would soon be able to cope with the virus and that the global economy would grow again – which also happened in 2021. Secondly, that Corona is permanently changing our lives: more home office, more online trade, life in the digital parallel world at all, of which technology companies such as Facebook, Netflix and Alphabet, online retailers such as Amazon or Zalando, but also Zoom, Slack or TeamViewer benefit.
And thirdly, it was thought that the interest-free and cash-flowing period would continue for the time being, especially since earlier attempts at normalization in pre-pandemic times had to be interrupted mostly because of a new crisis of the century. It was the same in spring 2020, when central banks shifted the lever around the world. Since then, a lot has been planned, calculated and bet with the quasi-free money. There were exaggerations, huge bets. Incidentally, many investment and transformation packages in Europe and the USA are also based on this premise.
Assumptions two and three are now being tested and questioned: If Omicron really initiates the phase from pandemic to endemic, if it is the variant in which we eventually let the virus run – which some countries are already trying to do – then the pandemic could actually end. That would shake the now sacred architecture of the Corona world from a sluggish life in a state of emergency at home and simultaneously in a brave new digital world.
Growth stocks are hopefuls
It wouldn’t collapse, but something crunches in the beams. That’s sad for Peloton shareholders, who might even have ordered their stock through Trade Republic while sitting on the luxurious exercise bike and sweating. But for all of us, as normal people, it would be good news. It’s also a shame for Netflix that there aren’t quite as many new people subscribing (they’re not canceling in droves, growth is just slowing down; it might even be a good opportunity to buy Netflix stock). But for all of us it could also mean: beer garden and restaurant, like in the past and forever.
Tech stocks fall when market rates rise because future earnings are “worth less.” Growth stocks are always hope values, hope for high profits in the future that are discounted. Investors are now reducing these bets somewhat, investing more conservatively in bonds and value stocks.
The best way to see this shift is to look at the prices of Cathie Wood’s Ark Innovations Fund compared to Berkshire Hathaway’s shares – i.e. growth versus value. Cathie Wood was considered a phenomenon for months, her aggressive bets on Tesla, Zoom or Coinbase made her a star. Since the soaring, her fund has lost more than half, since the beginning of the year by around 25 percent. Berkshire Hathaway with the ancient oracle Warren Buffett was considered to be left behind and outdated like a Cherry Coke that was no longer fresh. Berkshire Hathaways has held up well since the beginning of the year, and the stock has risen over a six-month period.
What’s next?
Well, the violent history of Corona so far is paved with prophecies that the pandemic will soon be over. Until March, until October, still a few months, you know the endless loop and are probably just as annoyed. But the markets are testing this scenario, which also suggests that “interest rate fears” have been around for weeks. But the word is misleading. Why be afraid of interest? Before the maneuver, you have concerns because it is not always clear where which spectacle has been a bit too wild in recent years.
Of course, the Fed, and perhaps soon the ECB, must first and foremost fight inflation that is far too high. And it’s actually worrying. Central banks didn’t see these inflation rates coming. Mohamed El-Erian, former Pimco boss and now Allianz Senior Advisor, has recently stated that this blind spot will go down in history as “one of the central bank’s worst inflation forecasts”.
Risky turnaround in interest rates
Certainly, many politicians, economists and central bankers would be more comfortable if the Fed could keep its foot on the gas pedal for some time. The turning maneuver is happening in a world that is still fragile. But the turnaround in interest rates and the cessation of bond purchases are also harbingers of a phase in which the state of emergency will end, and with it the state of the monetary system that has been making us all a bit uneasy for years. There are people who wish that the trillions from the central banks could continue to bubble up without any problems or interest. But they always sound like a mixture of alchemist and shell player.
The Fed’s turnaround is risky, even beyond the stock markets. The IMF dampened that anticipation a bit this week, lowering growth forecasts for 2022. A war in Europe, rising energy prices, Omicron overwhelms China, a new mutant, all of which may dampen or even end the recovery. Unfortunately, there are numerous downside factors for 2022.
The Fed believes the US economy is resilient enough to normalize. And they are more worried about inflation, which is at its highest level in decades. However, tight supply chains, long delivery times and cars that you have to wait months for are also a sign of healthy consumption. It would be worse if nobody bought cars anymore. The labor markets, even if some data send conflicting signals, have recovered, many industries are desperately looking for employees, both in the USA and in Europe. Movement data from Google and other service providers also indicate that the decline in activity is half what it was a year ago, when many countries were at the end of the second or third wave and populations were poorly vaccinated.
The correction on the capital markets was overdue, it ended some exaggerations, especially in tech stocks and corona winners. This can be seen at the end of the spac boom, as well as in the price of Bitcoin, which once again proves that it is not a fancy repository of wealth in a better art world, but a crazy object of speculation. Even if the US Federal Reserve raises interest rates four times in quick succession, interest rates will still remain low by historical standards. In Europe they will remain very low anyway, for the foreseeable future.
And Apple, Netflix, and Amazon, well, they’re stocks to keep on hand, even if we should soon be enjoying life much the same as before.
The article first appeared at Capital.de.
Horst von Buttlar is the editor-in-chief of Capital.