(Bloomberg) — For those concerned that a decade of ultra-easy monetary policy has created asset bubbles around the world, the first signs of trouble may be the formation of bloated markets.
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For Bank of America strategists including Michael Hartnett, there is a “simultaneous burst” bubble in assets including cryptocurrencies, palladium, long-term technology stocks and other areas of historical risk in the market. The decline in speculative areas comes as investors prepare for the US Federal Reserve to raise the pace of policy tightening.
“Decreased liquidity from the Federal Reserve will lead to a rise in both equity risk premium and interest rates, which will continue to disproportionately affect riskier assets in the market including momentum-driven investments in money-losing technology stocks, MIM stocks, and in particular currencies cryptocurrency, which has no intrinsic value,” according to Jay Hatfield, portfolio manager at Infrastructure Capital Advisors.
Here are eight charts showing speculative drain across different asset classes:
Ark Investment Management’s flagship ETF is down nearly 46% from its February 2021 high. The hawkish signal from the Federal Reserve has weighed heavily on high-value technology names, and many of these dominate, including Tesla Inc. and Roku Inc. , on the Ark chests.
Speculation is also being drained from other, riskier corners of the stock markets. A basket of Goldman Sachs Group Inc. shares fell. of unprofitable tech stocks after many years of rally while an index that tracks SPACs is down 35% from its highs.
“The potentially higher interest rate environment is causing investors to reassess the risks they are willing to take,” said Todd Rosenbluth, head of ETF research at CFRA. “Higher growth potential, yet less stable businesses are taking away the advantage as investors prioritize more stable businesses.”
However, he does not regard any of the breakup of these areas of the market as a sudden bubble.
“I don’t like the phrase bubble because it only becomes apparent in hindsight,” Rosenbluth added. “We are in the middle of this trend and its trajectory may or may not be reversed.”
The Nasdaq Biotech Index, which includes companies such as Amgen Inc. and Gilead Sciences Inc. , 6.5% in the first week of the new year, the worst five-day stretch since mid-March of 2020. Many members of the scale have yet to generate sales or profits and have been affected by investor rotations of high-risk and rewarding stocks.
Meanwhile, the Invesco Solar ETF, the TAN Index, saw an outflow of more than $70 million on Thursday, the largest since March of last year. The fund, which in 2020 made a gain of more than 230%, has lost its luster in recent days as the Fed has become more hawkish.
Cryptocurrencies have not been saved from the corruption of speculation. Bitcoin is down about 40% as of late Friday after hitting a record high of around $69,000 in November. Ether, the second largest cryptocurrency by market capitalization, is down about 35% from its November highs.
According to Noel Acheson, Head of Market Insights at Genesis Global Trading “Also, the market leverage is not at excessive levels but has been building up, which means that derivatives position liquidations are helping drive the market lower.”
The weakness in technology and cryptocurrency is a double whammy for an exchange-traded fund focused on these two industries: the Global X Fintech ETF. The fund — which includes tech startups including Affirm Holdings Inc. And crypto-related companies such as Coinbase Global Inc. – up 30% since hitting a record in October.
Meanwhile, Hang Sang Tech is down nearly 50% from its early 2021 highs as sweeping corporate regulations and fears of a housing bubble weigh on Chinese tech stocks.
Goods shrunk as well. After a multi-year rally that sent palladium to a record low in May, the metal is down about 35%.
“What we’ve seen in the past when prices are rising either through expectations of a Fed rate hike being pulled forward or up to 10 years, technology and some growth models seem to be affected more by the valuation side,” said Jerry Brackman, chief investment officer and president of First American. Trust in Santa Ana, California, by phone.
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