The market finally gets it: The Fed is going to tighten to get a handle on its massive inflation problem.
By Wolf Richter for WOLF STREET.
Since February last year, the hottest most hyped stocks, many of them recent IPOs and SPACS, have been taken out the back and brutalized, either one by one or jointly. The stocks that have by now crashed 60%, 70%, 80%, or even 90% from their highs include luminaries such as Zoom, Redfin, Zillow, Compass, Virgin Galactic, Palantir, Moderna, BioNTech, Peloton, Carvana, Vroom, Chewy, the EV SPAC & IPO gaggle Lordstown Motors, Nikola, Lucid, and Rivian, plus dozens of others. Some of these superheroes are tracked by the ARK Innovation Fund, which has crashed by 55% from its high last February.
This mayhem has been raging beneath the surface of the market since February last year, and in March, I mused, The Most Hyped Corners of the Stock Market Come Unglued. They have since then come unglued a whole lot more. But the surface itself remained relatively calm and the S&P 500 Index set a new high on January 3 this year because the biggest stocks kept gaining or at least didn’t lose their footing.
But now even the giants too are going over the cliff. Combined by market cap, the seven giants, Apple [AAPL], Amazon [AMZN], Meta [FB], Alphabet [GOOG], Microsoft [MSFT], Nvidia [NVDA], and Tesla [TSLA] peaked on January 3, and in the 13 trading days since then have plunged 13.4%. $1.6 trillion in paper wealth vanished (stock data via YCharts):
This is obviously still no big deal, a 13.4% decline, after this huge gigantic run-up. During the March 2020 crash, these giants plunged 28%. But it’s the first time since then that this unappetizing event has occurred.
And it has occurred because markets finally get it: Inflation is a massive four-decade problem for the Fed, and the Fed is about to lose, or has already lost, four decades of credibility as inflation fighter that Volcker was able to build. And so it is going to tighten to get this under some sort of control.
This tightening will consist of raising interest rates moderately, and by firing up Quantitative Tightening (QT), as the Fed governors explain at every chance they get. QT does the opposite of QE, and QE was responsible for driving up asset prices to these ridiculous highs.
And this notion of QT finally sank in – even among the biggest names.
The Nasdaq managed to make this four-day work week its worst week since March 2020, dropping 7.5% in those four days, to 13,768, the fourth week in a row of declines. It has now dropped 14.3% from its closing high in November.
The S&P 500 also booked the worst week since March 2020, dropping 5.7% for the week, to 4,398, the third week in a row of declines. It’s down 8.3% from its closing high on January 3.
The Dow Industrial Average dropped 4.6% during the four-day week, to 34,265, and by 6.9% from its January 3 closing high.
But this is really no big deal. On a long-term chart, these little dips can barely be seen. It’s just that markets have been spoiled by the relentless climb.
And folks are now re-familiarizing themselves with two essential concepts:
- Stocks can lose money, and they can lose all your money.
- Cash is trash, until it isn’t.
It is, however, a big deal for folks with a portfolio full of the most hyped stocks, IPO stocks, and SPACs that crashed 60% to 90%. If there was any margin involved, it may now be time to update the LinkedIn profile and look for a job again. Maybe some of the 11 million unfilled job openings can find some takers. And that would be a good thing.
Given the repeated ugly action at the end of the trading day this week, where dip buyers were taken out on stretchers, the meme is now starting to circulate that the market has shifted from “Buy the F&%#ing Dip” (BTFD) – the rallying cry since March 2020 – to a new rallying cry, “Sell the F&%#ing Rip” (STFR).
Which is of course nonsense since every sale must have a buyer on the other side, and every buy must have a seller on the other side, and lots of people must have jumped in to buy the dip at the end of those trading days – it’s just that the dip kept dipping.
Dip buyers have long been brutalized by their most hyped stocks and by their IPO and SPAC stocks. Month after month, BTFD was lethal for them with these stocks. But since January 3, dip buyers have also been brutalized by dip-buying the giant stocks as they kept on dipping. And now, there is big money involved.
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