Commentary the markets quake? This gives hope

Stock markets have been plummeting since the beginning of the year, by as much as ten percent. Yes, it also gives hope. If you’re now asking whether an undetected mutant has just taken up residence in my adrenal brain: Let me briefly elaborate on that thought.

For a few weeks now, things have been more turbulent on the stock markets, with tech stocks in particular plummeting, all of which had been doing so wonderfully and insanely well. Apple, just worth three trillion, suddenly ‘only’ worth 2.6 trillion. Netflix, Microsoft, Amazon, Meta, Alphabet, the whole Nasdaq 100 – down. The Dax likewise, the S&P 500 also. There are always small recoveries, including this week, but the money is being shuffled, out of stocks, into higher yielding bonds.

Germany’s leading index, the Dax, continues its downward trend, landing on Monday below the important mark of 15.000 points. Reasons for the sell-off are mainly the Ukraine crisis and the fear of the interest rate decision in the USA

The reasons come in staccato: the Ukraine crisis, of course, high inflation and the associated "interest rate fears". These fears were at least given a path and corridor on Wednesday: The U.S. Federal Reserve, Fed, plans to raise interest rates starting in March. Fed Chairman Jerome Powell’s words were clear and concise. He even left open the possibility of raising interest rates at the next meetings, which are held every six weeks or so. What the Fed hasn’t done since 2006. Fed-exit navigation in 2022 certainly won’t be easy, any more than navigating through an omicron wall will be.

However, all these corrections, with the exception of the Ukraine crisis, are signs of normalization. Yes, you could say that the markets are anticipating and acting out a life that we have been hoping for for the past two years. In addition, it was always clear that we must once leave the world of limitless cheap money. In other words, with Netflix growing less and marathon gawking, we might be outdoors or at the movies more again. And if central banks don’t add billions of government bonds to their balance sheets every month, that might not be so bad, either.

Exaggerations and huge bets

Stock markets had not only recovered since the March 2020 crash, some prices had climbed, others had downright exploded. This happened on a couple of premises: First, that the world would get over the virus fairly soon and the global economy would start growing again – which it did in 2021. Second, that Corona is permanently changing our lives: more home offices, more online commerce, a life in the digital parallel world in general, from which above all technology companies like Facebook, Netflix and Alphabet, online retailers like Amazon or Zalando, but also Zoom, Slack or TeamViewer are profiting.

And thirdly, it was thought that the interest-free and money-generating period would continue for the time being, especially since earlier attempts at normalization in pre-pandemic times usually had to be interrupted because of a new crisis of the century. That’s how it was in the spring of 2020, when central banks around the world flipped the lever. Since then, there has been a lot of planning, calculating and betting with the quasi-cash money. There were exaggerations, huge bets. Incidentally, many investment and transformation packages in Europe and the USA are also built on this premise.

Assumptions two and three are now tested and questioned: If Omikron really initiates the phase from pandemic to endemic, if it is the variant where we eventually let the virus run – which some countries are already trying to do – then the pandemic might actually end. This would shake the now sacred architecture of the Corona world from a seething life of exception at home and simultaneously in a brave new digital world.

Growth stocks are hope stocks

It would not collapse, but there is something creaking in the woodwork. That’s sad for shareholders of Peloton, who may have even ordered their stock sitting on the luxury exercise bike and sweating over Trade Republic. But for all of us, so as normal people, it would be good news. It’s also a shame for Netflix if not quite as many new people are subscribing anymore (they’re not canceling in droves, after all, growth is just declining; it might even be a good opportunity to buy Netflix stock). But for all of us it could also mean: beer garden and restaurant, as before and forever.

The streaming provider, which was hotly traded as a Corona profit fire just a short time ago, has caused pure horror on the stock exchange with its outlook. After the crash, it’s worth taking a slightly closer look at Netflix stock

Tech stocks fall when market rates rise because future profits are "worth less". Growth stocks are always hope stocks, hope for high profits in the future, which are discounted. Now investors are scaling back these bets a bit, investing more conservatively, in bonds and substance 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 stock – 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 highs, your fund has lost more than half, down about 25 percent since the beginning of the year. Berkshire Hathaway with the age-old oracle Warren Buffett was considered to be out of touch and outdated like a not-so-fresh cherry Coke. Since the beginning of the year, Berkshire Hathaways has held its own, and on a six-month view, the stock is up.

Where do we go from here??

Well, Corona’s torrid history so far is paved with prophecies that the pandemic will soon be over. Until March, until October, a few more months, you know the infinite loop and are probably just as annoyed. But 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 rates? Before the maneuver one has worries, because it is not always clear where which spectacle was a little too wild the past years.

Of course, the Fed, and perhaps soon the ECB, must first and foremost fight inflation, which is far too high. And that is indeed a concern. Central banks didn’t see these inflation rates coming Mohamed El-Erian, once Pimco chief and now Allianz senior advisor, noted these days that this blind spot will go down in history as "one of the worst central bank inflation forecasts".

Risky turnaround in interest rates

Certainly, many politicians, economists and central bankers would be more comfortable if the Fed could stay on the gas pedal for a while longer. The turnaround maneuver happens in a world that is still fragile. But the turnaround in interest rates and the halt in bond purchases are also harbingers of a phase in which the state of emergency will end, and with it that state in the monetary system that has made us all a little queasy for years. While there are those who wish that the central banks’ trillions could continue to bubble away like this, without problems or interest. But they always sound like a cross between an alchemist and a shell game player in the process.

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, Omikron overwhelming China, a new mutant, all may dampen or even end the recovery. Downside factors for 2022 are unfortunately numerous.

The U.S. Federal Reserve signals a rate hike in March and announces the end of its bond purchases. But despite this taper, monetary policy in the U.S. remains expansionary in the face of high inflation

Fed believes U.S. economy is robust enough for normalization. And that worries more about inflation, which is higher than it’s been in decades. Tight supply chains, long delivery times and cars you have to wait months for, however, are also a sign of consumer spending intact. It would be worse if no one would buy cars anymore. Labor markets, although some data send conflicting signals, have recovered, with many industries desperately seeking employees, both in the U.S. and in Europe. Movement data from Google and other service providers also provide evidence that the decline in activity is half of what it was a year ago, when many countries were at the tail end of the second or third wave and populations were barely immunized.

The correction in capital markets was overdue, ending some exaggerations, especially in tech stocks and Corona winners. This is evident in 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 maniacal speculative asset. Even if the Fed makes four interest rate moves in quick succession, 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 remain stocks to keep in your portfolio, even if we should soon be enjoying life almost as it was before.

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