Saturday, July 2, 2022

Why the stock market and bitcoin keep crashing?

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Unfortunately, stocks don’t go up alone

The past few years have been quite exciting for many investors. After the stock market collapsed at the start of the Covid-19 pandemic, things were going pretty well. The S&P 500 climbed by 16 percent in 2020 and nearly 27 percent in 2021. Hordes of individual investors rushed to trade, getting into meme stocks like GameStop and AMC, and enjoying the benefits of a fairly broad bull market. Some dove into cryptocurrencies like bitcoin, which traded for parts over $60,000 per coin last fall. Tech companies, from Peloton to Netflix to Amazon, felt like pretty sure bet on growth

The setting might have made it a little easy to forget that bull markets don’t last forever and the water can get choppy. As the saying goes, markets often take the stairs up and the elevator down, and we’re in the elevator right now.

The S&P 500, the Dow Jones Industrial Average and the Nasdaq are now well below where they were at the start of the year, down 16 percent, 11 percent and 24 percent respectively from the market’s opening on Tuesday. Last week, the Dow and Nasdaq saw their worst one-day declines since 2020. This week, the S&P 500 reaches its lowest level in a year. Especially many big and small names in the tech sector are having a hard time. Bitcoin, which many proponents have long argued is a form of digital gold that could serve as a hedge for market turmoil, fell below $31,000, less than half of where it peaked at nearly $69,000 in November. 2021. bond market has been hit

Shares appeared ready to recover Tuesday after a tumultuous past few days, but in the broader recent picture there were not really many bright spots. Chances are, if you look at your investments right now, you might not be feeling very well.

“In market dislocations, correlations always go to one. Everything moves together,” said Nick Colas, co-founder of DataTrek Research. “There is never a safe haven when the storm is in full force.”

We are now in the middle of quite a storm. It’s also something most investors should probably try to get through – stocks don’t go down forever.

“While we’re seeing this broad sell-off in the market, and it seems like there’s no getting around it, this isn’t exactly a time for panic,” said Kristin Myers, editor-in-chief of the Balance, a financial website.

There’s a lot to be concerned about on Wall Street and the economy right now

There is never a single answer to why markets do what they do, why stocks rise and fall, or why investor sentiment changes overnight. With that in mind, perhaps the best explanation for what’s going on right now is that there are many reasons for investors to panic, and they are.

Inflation is a problem in the United States and around the world, with US inflation at its highest level in 40 years. The Federal Reserve has begun raising interest rates and will soon begin: reduce her balance to fight inflation and bring prices back under control. Those measures may be necessary, but they also make Wall Street nervous.

“It always works; that’s the good news. The bad news is that it always works because it causes a recession,” Colas says.

Maybe not always. A recession in the near future is not a foregone conclusion, but it is more likely than it was just a year ago. Analysts at Goldman Sachs estimation there is a 38 percent chance that the US economy will enter a recession in the next 24 months. Deutsche Bank has predict a recession also, first saying it believed it would be “mild” and then getting a little more pessimistic.

Ideally, the Federal Reserve would be able to cut inflation without triggering a recession. In early May, Fed Chair Jay Powell stated that inflation is “way too highand the central bank has a “good chance” of restoring price stability without triggering a severe economic downturn. But it’s a difficult needle to thread, Kristina Hooper, chief global market strategist at Invesco, said in an email, and the tea leaves are hard to read. “The markets are clearly confused about what the Fed will do this year and how aggressive it will become,” she said.

At the same time, there are other uncertainties plaguing investor sentiment. Russia’s war in Ukraine is underway, which could exacerbate inflation, supply chain problems and oil price fluctuations, adding to a general sense of unease. Slowing growth in China and concerns about the impact of Covid outbreaks there also contribute to fears

“There are times in the market when things seem pretty predictable, and the market gradually moves up during those periods because tomorrow looks like today,” Colas said. “Then there are times when things are very uncertain, like now, and the range of expected results is wider. When that happens, market volatility is always higher.”

Sometimes what goes up comes down a little bit – or a lot

As mentioned above, many assets have risen quite a bit in recent months and years, perhaps to the point where they traded against more than they should have been.

Sam Stovall, chief investment strategist at CFRA Research, pointed out that some dips in the market could be expected towards the end of the year. As a general rule, what goes up usually goes down for a while, at least a little bit. Every time the S&P has been higher than 20 percent or more in the course of a year since World War II, investors have “digested” some of those gains early in the new year — in other words, returned some gains. “Stocks were definitely expensive,” Stovall said.

The Nasdaq, which tracks technology stocks, and the Russell 2000, which is composed of small-cap stocks, have already entered bear market territory, meaning they are 20 percent away from their recent highs. Stovall warned that the S&P 500 could be close behind.

Tech companies in particular have been hit hard. For example, the home fitness company Peloton, once a pandemic darling, has been in big trouble, business-wise. Its market cap, which once peaked at about $50 billion, is now less than $5 billion. The stock trading platform Robinhood recently announced laid off, just like the streaming company Netflix, whose stock price was hammered in April after it announced it had lost subscribers in the first quarter of the year. Uber say it cuts costs and slows hiring, and Facebook parent company Meta intends to delay recruitment, at. Share prices of Amazon, the parent company of Google, Alphabet and Meta, are all down more than 20 percent this year.

Higher interest rates tend to negatively affect valuations and stock prices, and they can hit technology especially hard. “Higher interest rates take a bite out of future earnings, and for high-growth stocks, those future gains are everything to them,” Myers said.

As the Wall Street Journal notes:tech companies have served as a relatively reliable source of growth in recent years. What’s not clear now is whether this is a temporary realignment and slowdown or a sign of a broader, more ongoing slowdown in what has been a pretty hot area. maybe there was too much excitement around some of these companies in the first place.

“Tech companies, many of them, especially consumer products companies, were overvalued on the venture side, and many of those companies that have since [gone public]if you will, have largely lost their appreciation,” said Arjun Kapur, a venture capitalist focused on the Internet and consumer technology.

The crypto industry has not been immune to market movements either – a sign that it is not as isolated from the market as some of its investors would like to believe. “The people who own crypto tend to own stocks, and that means that even if the asset class is fundamentally decoupled from stocks, it is still connected by investor confidence in the future,” Colas said.

“Most asset classes other than cash are coming under pressure,” Hooper said. “This includes crypto.”

As life returns to normal compared to where it was at other points in the pandemic, some of the trends that made certain companies attractive are reversing. People are starting to live in the real world again and depend a little less on the internet for every part of their lives.

“We have to kind of understand that as a society, as a world, as an economy, as a stock market, we are still in the early stages of getting out of the zombie apocalypse and the shutdown and the pandemic,” he said. Brian Belski, chief investment strategist at BMO Capital Markets. “We still live by different rules, and we’re trying to unwind those different rules as we move toward this transition from normality.”

Things may be bad for a while, but they probably won’t be bad forever

At times like these, where all the CNBC hyrons are red and all the headlines are talking about market collapse, it’s natural to feel panicked about the financial future. cafemadrid isn’t in the business of giving investment advice, but just in terms of some life advice, the best is probably this: don’t panic.

Historically, the stock market has risen over time and almost any expert will tell you that it will eventually. Think back to how nervous many people were about the markets in February and March 2020 when they were in free fall and what happened next.

If you’re young and have the guts for it, now might not be a bad time to buy, Myers said, namely if there are stocks or assets you’ve been eyeing that are trading lower now than in the past. “Consider this if everything is for sale,” she said.

While you often hear that times like these are not a good time to check in to your 401(k), it may not be a bad reminder that you should check in more often. Myers suggests quarterly as a good rule of thumb, just to see what’s going on and re-evaluate. “It doesn’t mean you have to make a lot of changes, but maybe it’s time for you to move your assets around a bit,” she said. Moving assets does not translate into payout.

Hopefully, by the time you get closer to retirement, your portfolio has already moved away from riskier investments, such as stocks, and into something slightly less volatile. If you haven’t already, now might be a good time to think about it.

Bigger Picture: Ideally, investing is a long game that you should be able to win.

“I think investors need to remind themselves that market declines are pretty common,” Stovall said. That doesn’t mean the markets won’t recover over time. “If investing is gambling, I would like to know which casino pays the gambler 80 percent of the time. In 80 percent of all years since World War II, the S&P 500 has posted positive 12-month total returns.”

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