Fears of financial crisis loom with mega-tech stocks deep in bear territory

THE pandemic stock-market and cryptocurrency bubble has officially burst, and now the question is whether the speculative unwind will trigger a global financial crisis.

The broad Standard & Poor’s 500 has fallen 18 per cent from its 2020 highs, the closest that the traditional US stock-market gauge has come to a bear market since the crash at the start of the pandemic in early 2020.

For the more speculative Nasdaq Composite, the damage is much worse, with a loss of 29 per cent. Bull-market leaders like electric-vehicle makers are short-circuiting. Even the mega-cap tech stocks such as Apple, Amazon and Facebook parent Meta Platforms, which seemed to be invulnerable to economic and market cycles, are now deep in bear-market territory.

With the fever breaking, the pandemic bull market is increasingly looking like a mania comparable to past episodes of mass investment hysteria like the Gold Rush or the Dotcom bubble.

GameStop, the ultimate meme stock, is trading at less than a third of its pandemic highs at around US$80. The question of how the videogame chain’s business was once valued at more than US$22 billion is likely to plague participants in the 2020 stock craze, as much as the question of how the slightly ludicrous Pets.com went public at US$300 million in 2000 has embarrassed that particular generation of investors.

Once-popular stocks are now experiencing significant losses - streaming service Netflix is down 70 per cent, e-commerce services firm Shopify is down by more than 80 per cent. Bitcoin has been cut in half since its peak late last year, losing US$500 billion in market cap and wiping out all of its 2021 gains. Some smaller cryptocurrencies have fallen by 90 per cent or more.

“Wall Street has benefited from a historic response to the pandemic, with monetary and fiscal support,” said Edward Moya, a senior market analyst at foreign-exchange brokerage Oanda Group. “Now that is being taken away, you are starting to see a repricing of assets. There is a lost confidence in many of the favourite trades that delivered some of the best returns in the last few years.”

The trigger for the latest leg down was US Federal Reserve chairman Jerome Powell’s acknowledgment on April 21 that inflation had spun so far out of control that the central bank would likely raise interest rates by 50 basis points at its May meeting.

Strategists say things have reached a stage where fears feed on themselves, and institutions are forced to sell assets of all kinds to meet “margin calls” on their riskiest bets. This is the phase where stocks that had stayed out of the fray, such as utility stocks, see sudden plunges of their own, as hedge funds and other leveraged investors have to cash in whatever they can.

“It’s fascinating to see just how easy this market gets rattled with fears of additional Fed tightening,” said Moya.

The Fed not only pumped up stocks with its cheap money and risk In a financial crisis, “contagion” often spreads through the broad market from a major malfunction on the market fringes – a run on an obscure bank, or the implosion of a hitherto unknown hedge fund. In this case, the financial niche in the deepest trouble is that of the “stablecoins”, versions of cryptocurrencies specifically designed to hold their value.

Financial regulators, including US Treasury Secretary Janet Yellen, had warned that these cryptocurrencies were dangerous because they provided the illusion of stability. One of the largest, TerraUSD, has broken down, straying more than 35 per cent below its US$1 peg at one stage. Some crypto watchers have called the TerraUSD crisis a “Lehman moment” for the decentralised digital currency world.

Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund, is a student of the history of speculation. Should the crypto crash continue, bringing Bitcoin all the way down to US$10,000, it could cause a wider financial crisis, he said. For now, there are signs that the panic has reached a short-term peak.

The sugar high from all the rate cuts and stimulus checks is beginning to wear off. The only question is whether the 2022 comedown is remembered as a financial crash or just another bear market.