Posted Apr 27, 2022, 6:08 PMUpdated on Apr 27, 2022, 6:28 PM
Is the long love affair between tech and the stock market living its last hours? On Wall Street, the tech-heavy Nasdaq is in turmoil. It plunged almost 4% on Tuesday. Despite a slight rebound on Wednesday (+0.6% in the middle of the afternoon), it has already fallen by more than 11% in April and is heading for its worst monthly performance since October 2008.
Its losses amount to about 20% since the beginning of the year. The equivalent of more than 5,000 billion dollars of capitalization went up in smoke. For professionals, this is a sign that the index has fully entered a “bear market” after years of almost uninterrupted rises. It remains to be seen how far prices may fall and for how long. When the Internet bubble burst a little over 20 years ago, the Nasdaq took two and a half years to recover, after total losses of more than 75%.
Now, as then, it was the Fed’s monetary tightening that is causing market stress . The sharp rise in interest rates – up from 1.5% to almost 2.8% this year on the US 10-year – weighs heavily on stock market valuations. The value of future profits is all the greater when interest rates are low, and vice versa. The shock is brutal for tech groups whose valuations are still largely inflated. “Rising rates could also discourage speculative demand for equities and lead to a vicious circle of liquidation to pay for margin calls,” stresses Axel Botte of Ostrum.
The downward revision in valuations might be bearable in a buoyant environment. But the economic context has deteriorated rapidly since the start of the year due to the Russian invasion of Ukraine and the confinements in China in particular. Pessimism and nervousness have replaced blissful optimism and speculative exuberance in the markets. The volatility index, the VIX, nicknamed the “fear index” because it tends to jump during times of market stress, closed over 33.5 points on Tuesday, its highest level ever. year except for the days following the invasion of Ukraine.
The slightest sign of weakness is now violently sanctioned. Yesterday’s stars no longer have the right to make mistakes. Robinhood, the troublemaker of online brokerage and pioneer of “zero commission”, paid the price. The brokerage application acclaimed by stock traders announced Tuesday the dismissal of 9% of its employees. Its title has collapsed by more than 70% since its triumphant IPO last summer.
Dives of this magnitude are becoming more and more frequent across the Atlantic. The most famous names in tech are not immune. Investors have not forgiven Meta (ex-Facebook) for its disappointing outlook (-47% this year), and the penalty has been even heavier for Netflix, down 68% in 2022. “This reaction is symptomatic of ‘increased sensitivity to earnings prospects,’ explains Axel Botte. “This points to a certain fragility of the markets and the asymmetrical nature of reactions to surprises when valuations are high,” he adds.
The internet giants drop out
Even the giants of the net pick up. Among the Gafam (Google, Apple, Facebook, Amazon and Microsoft), only the Apple brand manages to stand out. With losses of 11.4%, Apple is doing a little better than the S&P 500 (-12%). The others are down at least 16% since the start of the year, including Alphabet, Google’s parent company, which fell another 3.5% on Wednesday after publishing results below expectations in the first quarter. From engines, these behemoths have become dead weights for Wall Street.
Some observers see in this the beginnings of a much more severe crisis. “A collapse will happen,” warns Albert Edwards of Societe Generale, known for his pessimism. Many investors are beginning to wonder about a possible market capitulation. In other words, an episode of generalized panic. In this type of situation, participants are ready to sell at any price, even at a loss, because they think that the situation will continue to deteriorate.
The danger is very real, abounds Emmanuel Cau of Barclays: “if fears about growth intensify, a capitulation is possible”. Equity funds have started to withdraw. In the past four weeks, they have suffered capital outflows. For the moment, these remain moderate, but this is the first time since September 2020 that the movement has lasted so long. If investors were to panic and withdraw their capital massively, the correction could quickly escalate.