A bear market has settled in for tech stocks as the Fed turns hawkish. It doesn’t bode well for
Tech is suffering under a barrage of negative pressure: high valuations, slowing growth, and rising interest rates. There also are deepening concerns the Federal Reserve will tip the economy into a recession by tightening monetary policy, removing much of the stimulus it deployed during the pandemic.
Not only is the Fed raising interest rates, it is also seeking to slow the economy by shrinking its balance sheet, a process known as quantitative tightening. That is removing excess liquidity from financial markets, and it is likely to increase borrowing costs by pushing up bond yields—raising the cost of debt financing.
All of it is aimed at taming inflation, of course, while allowing the economy to continue to grow. But that kind of “soft landing” is looking less likely, according to many economists.
“The Fed is much further behind the inflation curve now than it was during the past three soft landings,” said economist Ed Yardeni of Yardeni Research, in a recent note. “Furthermore, nine recessions have followed tightening cycles since 1960. So we wish the Fed lots of luck!”
While the Fed has engineered soft landings a few times—in 1965, 1984, and 1994—this time may be tougher, according to Chris Senyek, chief investment strategist at Wolfe Research. “Our sense is that persistently high inflation and the lagged behind impacts of Fed tightening are likely to spark a recession—perhaps as early as the fourth quarter!” he wrote in a commentary on Monday, advising clients to “stay defensive.”
Those macro headwinds could make it much tougher for Bitcoin and other cryptos to revive from their own bear market. Bitcoin, at around $39,000, is down 16% this year. It remains down more than 40% from its peak last November near $69,000.
Ether,
the native token of the Ethereum network, is down 42%. Smaller cryptos are faring worse, with
Solana
and Avalanche, two of the largest “alt coins,” both off more than 50% from peak prices.
Bitcoin and the
S&P 500
are closely correlated to global money supply, according to Stifel chief equity strategist Barry Bannister. Indeed, a chart of global M2 money supply since 2014 overlaid against both the
S&P 500
and Bitcoin shows them to be in sync—with stocks and Bitcoin rising and falling in tandem as the money supply expands and contracts.
Bitcoin is even more sensitive to changes in money supply than stocks, according to Bannister. A more hawkish Fed and strengthening dollar will both exert downward pressure on the money supply, he notes.
“As Fed policy normalizes and inflation stays high, market returns will drop to zero, compounded, for the next 10 years,” he said in a recent interview. “The time to buy Bitcoin is when the Fed pivots to a dovish stance. As long as the Fed is tight, Bitcoin always suffers.”
Bannister has been bearish for some time—as early as 2018. Investors who sat in cash back then would have missed a huge rally in stocks and Bitcoin. But this tightening cycle is likely to be longer and tougher on “risk assets” than prior ones. The war in Ukraine, global supply-chain problems, and ongoing lockdowns in China related to Covid also make the outlook less favorable.
Crypto-related stocks are feeling the brunt of the tougher macro climate.
Coinbase Global (COIN) is down more than 65% from its 2021 peak. Other hard-hit stocks include crypto trading apps such as
Block (SQ),
PayPal (PYPL), and
Robinhood Markets (HOOD); Bitcoin mining stocks like
Riot Blockchain (RIOT) and
Marathon Digital Holdings (MARA); and exchange-traded funds like the
Bitwise Crypto Industry Innovators fund (BITQ),
Amplify Transformational Data Sharing
ETF (BLOK), and
Siren Nasdaq NexGen Economy
ETF (BLCN).
While the near term doesn’t look great, the markets could rally in the third and fourth quarter after the Fed’s rate medicine is more widely absorbed by the markets and inflation moderates.
Bitcoin has had a few good performances in May. According to CoinDesk, Bitcoin prices have gained in seven years out of the past 11 years during the month of May. That is only a 64% batting average, however, which isn’t very statistically convincing.
The adage “sell in May and go away” could prove prescient once again.
Write to Daren Fonda at [email protected]
