shock end of easy money

A blow to the markets. Stock indices are being punished by the start of interest rate increases on both sides of the Atlantic. The end of the free money will be costly for all investors.

“Sell in May and leave?” The stock market adage, which supposedly illustrates a decline in average stock performance once dividend season has passed, is being repeated this year with a bitter taste.

Investors have not been satisfied with the trajectory of the markets since the beginning of the year. But now, in the middle of spring, the signals for caution continue to grow: markets are firmly in a bearish phase.

Indicators are falling, rates are rising

The S&P 500 is down 16% since January 3, its historic peak. The Nasdaq, which is dominated by technology, is down 25% in 2022 and 27% since its high in November 2021. Europe is in a slightly better position. Paris and Frankfurt yields 14%. London, where oil and defensive stocks are largely present, is fighting back, particularly in the health world, but it is an exception.

Correction is visible without noticing panic movements. But economists and market operators are more divided on rhythm than on trend. Because after the pullback sessions, the recovery is clearly lacking in tone, long hands eager to engage based on current prices, minor correction or permanent disruption? The era of easy money is really over, like the era of “Tina” “There is no alternative” (There is no alternative) – which has seen investors accept negative nominal rates. The resurgence of inflation is prompting central banks to act with the risks of brutality, which will keep stock markets volatility and their downward tendency.

“Two years ago, in July 2020, the Fed was saying, ‘We’re not even considering a rate hike.’ In June 2021, it reported the first increase for 2023. Today, it claims that it is ‘absolutely necessary to bring down inflation.’ That means that monetary tightening will occur despite the economic slowdown,” analyzes Frederic Rollin, Pictet’s investment strategy advisor. After its first rate hike of 0.5%, the first since 2000, the Fed is heading towards accelerating the rally, hinting at the next move of 0.75%. “It prefers time-limited stagnation over persistent inflation,” summarizes Philip Wachter, director of economic research at Ostrum AM.

The European Central Bank will also tighten

Henceforth, on this side of the Atlantic, a sclerosis scenario is also gaining potential. “Everything indicates that the ECB will raise its key interest rate at the July 27 meeting,” said Bruno Cavalier, chief economist at Oddo BHF. Admittedly, the decision will not be announced before the June 15 meeting, but the recent “capitulation” of many moderate conservatives (Ren, Villeroy de Gallo, de Guindos) clearly indicates that the ECB’s center of gravity has shifted to a restricted position. The idea of ​​two increases in 2022 is gaining ground.

Thus, the risks of continued weakness in stock markets for several months are more numerous. Frédéric Rollin continues: “This combination of an economic slowdown and central banks that will raise rates is more sensitive because other risks associated with Chinese growth and the European situation loom, with the Russian-Ukrainian conflict.” He says Wall Street is more exposed. “In Europe, risk premiums are still quite satisfactory, especially compared to the situation in the United States where stocks are poorly protected by yield.” It calls for real caution about US stocks.

The major downturn in US technology assessment multiples will continue. The shocks are often amazing as evidenced by the cases of Peloton Interactive and Rivian. So prominent in 2021, their star in the stock market has faded. Thus, sports equipment manufacturer Peloton Interactive has lost 93% since its high in January 2021, with its price now down two-thirds from its introductory level in 2019.

On the part of Rivian, one of Tesla’s most eagerly awaited rivals in the electric car space and the biggest IPO on Wall Street last year, the expiration of the shutdown period — the provision that prohibits joint stock companies from selling their shares within six months of listing — creates a bailout.

Investors fear the influx of securities, particularly from Ford and Amazon, which are in the capital. As a result, the electric truck manufacturer has fallen 70% since last November and 87% is at an all-time high! He no longer burdens the stock exchange with more than twenty billion dollars.

The bursting of the second bubble of American technology would be painful. The date can serve as a clarification in the absence of a reference: between March 2000 and October 2002, that is, for a period of thirty-one months, the Nasdaq compound lost 78% of its value.

Leave a Comment