How to make the mark

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Those who can read the signs correctly now have an advantage.

(Photo: picture alliance/dpa/New York Stock Exchange via AP)

The stock market week was turbulent. The curbing of the flood of money, inflation and the energy crisis are giving stock market players a hard time. But if Netflix grows less after all the exaggerations we have seen in the stock market, it can only bode well.

Stock markets have been plummeting since the beginning of the year, by as much as ten percent. Yes, it also gives hope. Now, if you’re asking if some unidentified mutant has just taken up residence in my adrenal brain: Let me briefly elaborate on the thought.

The stock markets have been more turbulent for a few weeks now, with tech stocks in particular plummeting, all of which had been doing so wonderfully and insanely well. Apple, just now worth three trillion, suddenly "only still 2.6 trillion. Netflix, Microsoft, Amazon, Meta, Alphabet, the whole Nasdaq 100 – down. So could the Dax, so could the S&P 500. There are always small recoveries, also this week, but the money is shifted, out of stocks, into higher yielding bonds.

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The reasons come in staccato: The Ukraine crisis, of course, the high inflation and the associated "interest rate fears". Those fears were at least given a path and corridor on Wednesday: The Fed plans to start raising interest rates in March. Fed Chairman Jerome Powell’s words were clear and unequivocal. He even left open the possibility of raising interest rates at the next meetings, which are held every six weeks or so. What the Fed hasn’t done since 2006. Fed exit navigation in 2022 certainly won’t be easy, any more than navigating through an Omicron wall will be.

However, with the exception of the Ukraine crisis, all these corrections are signs of normalization. Yes, you could say the markets are anticipating and acting out a life we’ve been hoping for for the past two years. Moreover, it has always been clear that we will have to leave the world of limitless cheap money one day. In other words, with Netflix growing less and marathon gawking, maybe we’ll be outdoors or at the movies more again. And if central banks weren’t dumping billions of government bonds onto their balance sheets every month, that might not be so bad either.

Exaggerations and huge bets

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The stock markets had not only recovered since the crash in March 2020, some prices had climbed, others had really exploded. This happened under a few premises: First, that the world would soon get over it and the global economy would start growing again – which it did in 2021. Second, that Corona is permanently changing our lives: more home offices, more online commerce, a life in the digital parallel world in general, from which especially technology companies like Facebook, Netflix and Alphabet, online retailers like Amazon or Zalando, but also Zoom, Slack or TeamViewer are profiting.

And third, it was thought that the interest-free and money-spinning period would continue for now, especially since previous attempts at normalization in pre-pandemic times usually had to be interrupted because of a new crisis of the century. That’s how it was in the spring of 2020, when central banks around the world flipped the lever. Since then, there has been a lot of planning, calculating and betting with the quasi-free money. There have been exaggerations, huge bets. Incidentally, many investment and transformation packages in Europe and the USA are also built on this premise.

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Assumptions two and three are now being tested and questioned: If Omikron really does initiate the phase from pandemic to endemic, if it is the variant where we eventually let the virus go – which some countries are already trying to do – then the pandemic could actually end. This would shake the now sacred architecture of the Corona world of a boiling life in a state of emergency at home and simultaneously in a brave new digital world.

Growth stocks are hope stocks

It would not collapse, but there is something creaking in the woodwork. That’s sad for shareholders of Peloton, who may have even ordered their stock sitting on the luxury exercise bike and sweating over Trade Republic. But for all of us, as normal people, it would be good news. It’s also a shame for Netflix if not quite as many new people are signing up for subscriptions anymore (it’s not like they’re cancelling in droves, growth is just slowing; it might even be a good time to buy Netflix stock). But for all of us, it could also mean beer garden and restaurant, like before and forever.

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Tech stocks fall as market rates rise because future profits ‘worth less’ Are. Growth stocks are just always hope stocks, hope for high profits in the future that are discounted. Now, investors are cutting back on these bets, investing more conservatively in bonds and value stocks.

The best way to see this shift is to look at the prices of Cathie Wood’s Ark Innovations fund versus Berkshire Hathaway’s stock – i.e., growth versus value. Cathie Wood was considered a phenomenon for months, her aggressive bets on Tesla, Zoom or Coinbase made her a star. Since the highs, her fund has lost more than half, down about 25 percent since the beginning of the year. Berkshire Hathaway, with its ancient oracle Warren Buffett, was considered as out of touch and outdated as a not-so-fresh cherry Coke. Since the beginning of the year, Berkshire Hathaways has held its own, and on a six-month view, the stock is up.

How it goes on?

Well, Corona’s violent history so far is paved with prophecies that the pandemic will soon be over. Until March, until October, a few more months, you know the infinite loop and are probably just as annoyed. But the markets are testing this scenario, which also suggests that there are "interest rate fears" for weeks there. But the word is misleading. Why be afraid of interest rates? There are worries before the maneuver because it is not always clear where what spectacle has been a little too wild the past few years.

Of course, the Fed, and perhaps soon the ECB, must first and foremost fight inflation, which is far too high. And that actually causes concern. Central banks did not see these inflation rates coming, Mohamed El-Erian, once Pimco chief and now Allianz senior advisor, noted these days that this blind spot will go down in history as "one of the worst central bank inflation forecasts".

Risky interest rate turnaround

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Certainly, many politicians, economists and central bankers would be more comfortable if the Fed could stay on the gas pedal for some more time. The turnaround is happening in a world that is still fragile. But the turnaround in interest rates and the halt in bond purchases are also harbingers of a phase in which the state of emergency will end, and with it that state in the monetary system that has been making us all feel a little queasy for years. While there are those who wish that the central banks’ trillions could continue to bubble away without any problems or interest rates, there are also those who wish that the central banks’ trillions could continue to bubble away without any problems or interest rates. But they always sound like a mixture of an alchemist and a hat player.

The Fed’s turnaround is risky, even beyond the stock markets. The IMF dampened that anticipation a bit this week, lowering growth forecasts for 2022. A war in Europe, rising energy prices, Omikron overwhelming China, a new mutant, all that can dampen or even end the recovery. Downside factors for 2022 are unfortunately numerous.

Fed believes U.S. economy is robust enough for normalization. And she’s more worried about inflation, which is higher than it’s been in decades. Tight supply chains, long delivery times and cars that people have to wait months for are, however, also a sign that consumption is intact. It would be worse if no one bought cars anymore. Labor markets, although some data send conflicting signals, have recovered, with many industries desperately seeking employees, both in the U.S. and in Europe. Movement data from Google and other service providers also provide indications that the decline in activity is half of what it was a year ago, when many countries were at the end of the second or third wave and populations were barely vaccinated.

The correction in the capital markets was overdue, ending some exaggerations, especially in tech stocks and Corona winners. This is evident in the end of the Spac boom, as well as in the price of Bitcoin, which once again proves that it is not a fancy repository of wealth in a better art world, but a mad speculative object. Even if the U.S. Federal Reserve makes four interest rate moves in quick succession, rates will still remain low by historical standards. In Europe, they will remain very low anyway, for the foreseeable future.

And Apple, Netflix and Amazon, well, they remain stocks to keep in the portfolio, even if we should soon enjoy life almost as before.

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