Topline
As stocks stumble and cryptocurrency markets reel from a steep $400 billion correction, JPMorgan analysts warned in a Monday morning research note that other risky pockets in the broader market, including buzzy special purpose-acquisition companies and clean-energy stocks, are starting to approach bear market territory, unraveling the massive gains priced in under the longest bull market in history as investors worry about problematic inflation ahead.
It’s not just bitcoin reversing its massive gains this year. Once-booming IPOs, SPACs and tech … [+]
Key Facts
Though global stocks are only down 2.5% from their peaks in April and May, some stock indexes—including the tech-heavy Nasdaq—are down about twice as much in a telltale sign that “markets are expensive and inflation is running hot” enough to doubt the central bank policy that’s been supporting economic growth, JPMorgan analysts wrote in a Monday note.
Headlining the stark reversal of fortunes, the value of the world’s cryptocurrencies—after roughly tripling this year—has crashed nearly 18% from a Wednesday high due in large part to a slew of negative tweets from billionaire Elon Musk, a vocal cryptosupporter who’s recently soured on the world’s largest cryptocurrency.
Meanwhile, clean energy stocks, which tripled last year in anticipation of sweeping progressive climate legislation, have fallen more than 35% since January as the broader tech sector slips and inflation hikes up the prices of the commodities necessary to manufacture products in the field.
Blockbuster public-market debuts have been a hallmark of the pandemic stock market—with new listings from Airbnb, Coinbase, DoorDash and more—but after soaring more than 100% in a year to a peak in February, newly listed U.S. stocks are down 26%, according to the Renaissance IPO ETF.
It gets even worse for SPACs (themselves a frothy market indicator) and the companies they’ve taken public, which have plummeted an average of nearly 38% from a February high, according to the first-ever SPAC ETF.
That big drop is in line with the 34% plunge the ARK Innovation ETF—a fund invested in “disruptive” tech and whose biggest holding is Tesla—has witnessed since February.
Crucial Quote
“All of these moves are consistent with a chain reaction that occurs when markets are expensive . . . but the ecosystem connecting the economy, markets and the [Federal Reserve] isn’t a nuclear power plant destined for meltdown,” JPMorgan analysts led by John Normand wrote Monday, pointing out that past market cycles have shown about 80% of “seemingly expensive asset classes” that crash in one business cycle end up returning to previous highs in the next cycle.
Key Background
Analysts agree that the Federal Reserve’s unprecedented pandemic stimulus efforts have helped lift stocks and other assets to meteoric new price highs. However, concerns that pent-up demand and an economy awash with cash could spark problematic inflation and force the Fed to rethink its policy are now starting to rock the market. Stocks posted their worst week in three months last week, and at the same time, other assets have become increasingly sensitive to unpredictable shocks—most notably in the crypto market’s volatile reactions to Musk’s hot-and-cold tweets.
What To Watch For
“An inflation-induced stock market correction is possible, but an inflation-fueled shift in market leadership is more likely,” analysts at wealth advisory Glenmede wrote in a Monday note to clients, echoing commentary from other experts predicting that value stocks in recently hard-hit sectors like energy and financials will lead the market this year, as opposed to longtime market leaders in technology.
Tangent
Noteworthy investments to protect against inflation include energy stocks, gold and Treasury bonds indexed to inflation (also known as TIPS).
Further Reading
Elon Musk Sends Bitcoin Tumbling With A One-Word Tweet (Forbes)
These Solar Stocks Were Among The Worst Performers Of The Week. Here’s Why. (Forbes)
Stocks Finish Rough Week Down Over Rising Inflation Fears (Forbes)
