Why the stock market and bitcoin keep crashing

Unfortunately, stocks don’t just go up.

The last two years have been quite exciting for many investors. After the stock market tanked at the start of the Covid-19 pandemic, it has been on a hot streak. The S&P 500 is up 16 percent in 2020 and nearly 27 percent in 2021. Hordes of individual investors rushed into trading, plunging into meme stocks like GameStop and AMC and enjoying the advantages of a fairly large bull market. Some dove into cryptocurrencies like bitcoin, which was trading at more than $60,000 a coin for parts of last fall. Tech companies, from Peloton to Netflix to Amazon, felt like pretty safe bets for growth.

The environment made it perhaps a little easy to forget that bull markets don’t last forever and the waters can get rough. As the saying goes, markets often go up the stairs and down the elevator, and right now we’re in the elevator.

The S&P 500, Dow Jones Industrial Average and Nasdaq are now well below where they were at the beginning of the year, down 16 percent, 11 percent and 24 percent, respectively, as of market open on Tuesday. Last week, the Dow and Nasdaq posted their worst single-day declines since 2020. This week, the S&P 500 hit its lowest level in a year. Many big and small names in the tech sector, in particular, have been struggling. 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. The bond market has been affected.

Stocks looked poised to rally on Tuesday after a tumultuous past few days, but in the larger recent picture, there really haven’t been many bright spots. Chances are if you look at his investment right now, you might not feel so good.

“In market dislocations, the 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 raging.”

We are in the middle of a big storm right now. It’s also something most investors should probably try to weather: Stocks don’t go down forever.

“While we’re seeing this widespread sell-off in the market, and it seems like it can’t be helped, this isn’t exactly a time for panic,” said Kristin Myers, editor-in-chief of Balance Sheet. a finance website.

There is a lot to worry about on Wall Street and the economy right now.

There is never a single answer to why markets do what they do, why stocks go up and down, or why investor sentiment changes from one day to the next. With that in mind, perhaps the best explanation for what’s going on right now is that there are plenty of reasons for investors to panic, and there are.

Inflation is a problem in the United States and around the world, with the US inflation rate at its highest levels in 40 years. The Federal Reserve has started to raise interest rates and will soon begin to reduce its balance sheet to fight inflation and try to bring prices back under control. Those measures may be necessary, but they are also the ones that make Wall Street nervous.

“Always works; that’s the good news. The bad news is that it always works because it creates a recession,” Colas said.

Maybe not always. A recession in the near future is not a foregone conclusion, but it is more likely than it was, say, a year ago. Analysts at Goldman Sachs estimate there is a 38 percent chance that the US economy will slip into recession in the next 24 months. Deutsche Bank also forecast a recession, at first saying it thought it would be “mild” and then turning slightly more bearish.

The Federal Reserve, ideally, could reduce inflation without causing a recession. In early May, Fed Chairman Jay Powell declared that inflation is “too high” and that the central bank has a “good chance” of restoring price stability without causing a serious economic downturn. But it’s a difficult needle to thread, Kristina Hooper, Invesco’s chief global market strategist, said in an email, and tea leaves are hard to read. “Markets are clearly confused about what the Fed is going to do this year and how aggressive it is going to get,” she said.

There are other uncertainties plaguing investor sentiment at the same time. Russia’s war in Ukraine is ongoing, which could exacerbate inflation, supply chain problems and oil price fluctuations and contribute to a general sense of malaise. Slow growth in China and concerns about the impact of Covid outbreaks there are also contributing to anxiety.

“There are times in the market where things look pretty predictable, and the market gradually goes 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 greater. When that happens, the market volatility is always higher.”

Sometimes what goes up is only going to go down a little, or a lot.

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

Sam Stovall, chief investment strategist at CFRA Research, noted that going into the year, some market declines were expected. As a general rule, what goes up tends to go down for a while, at least a little. Every time the S&P has been up 20 percent or more over the course of a year since World War II, investors have ended up “digesting” some of those gains early in the new year; in other words, giving back some profits. “Stocks were definitely expensive,” Stovall said.

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

Tech companies, specifically, have been hit hard. For example, the home-exercise company Peloton, once a pandemic darling, has been struggling big business. Its market capitalization, which once peaked at around $50 billion, is now below $5 billion. Stock trading platform Robinhood recently announced layoffs, as did streaming company Netflix, whose share price took a hit in April after it announced it lost subscribers in the first quarter of the year. Uber says it is cutting costs and slowing down hiring, and Facebook parent company Meta also plans to slow down hiring. Share prices of Amazon, Google’s parent company Alphabet, and Meta are down more than 20 percent this year.

Higher interest rates tend to negatively affect stock valuations and prices, and could hit technology particularly hard. “Higher interest rates reduce future earnings, and for high-growth stocks, those future earnings are everything,” Myers said.

As the Wall Street Journal points out, in recent years, technology companies have served as a relatively reliable source of growth. What is not clear now is whether this is a temporary shakeup and slowdown or a sign of a broader and sustained slowdown in what has been a fairly hot area. Perhaps there was too much hype around some of these companies in the first place.

“Technology companies, a lot of them, especially consumer product companies, were overpriced on the risk side, and a lot of those companies that have since [gone public]they have mostly lost their valuations, so to speak,” said Arjun Kapur, a venture capitalist focused on internet and consumer technology.

The crypto industry has also not been immune to market moves, a sign that it is not as insulated from the market as some of its investors would like to believe. “People who own crypto tend to own stocks, and that means that even if the asset class isn’t fundamentally tied to stocks, it’s still tied through investor confidence in the future,” Colas said.

“Most non-cash asset classes are under pressure,” Hooper said. “This includes crypto.”

As life returns to a more normal state compared to other points in the pandemic, some of the trends that made certain companies attractive are reversing. People are coming back to life in the real world and relying a little less on the Internet for every part of their lives.

“We have to understand that we, as a society, as a world, as an economy, as a stock market, are still in the early stages of coming 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 undo those different rules as we inch through this transition to normalcy.”

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

At a time like this, where all the CNBC chyrons are red and all the headlines are talking about market crashes, it’s natural to panic about the financial future. Vox is not in the business of giving investment advice, but just in terms of some life advice, the best is probably this: don’t panic.

Over time, the stock market has historically risen, and almost any expert will tell you that that is what will eventually happen. Think about how nervous many people felt about the markets in February and March 2020 when they were in free fall and what happened after that.

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

While you often hear that this kind of time isn’t a good time to check your 401(k), it might not be a bad reminder to check it more often. Myers suggests once a quarter as a good rule of thumb, just to see what’s going on and reevaluate. “It doesn’t mean you have to make a lot of changes, but maybe it’s time you changed your assets a little bit,” he said. Moving assets does not translate into charging.

If you’re closer to retirement, hopefully your portfolio has already moved away from riskier investments like stocks and has become somewhat less volatile. If that hasn’t been happening, now might be a good time to think about it.

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

“I think investors need to remind themselves that market crashes are pretty common,” Stovall said. That does not mean that, over time, the markets will not recover. “If investing is gambling, I would love to know which casino pays the player 80 percent of the time. In 80 percent of all years since World War II, the S&P 500 has posted a positive 12-month total return.”

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