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Earlier this week, Wall Street chaos further accelerated as new inflation data continued to show an acute rise in prices while some big tech names saw stock prices steadily dropping. The Nasdaq, the S&P 500, and the Dow Jones have all ended the trading session in negative territory. The tech market bubble continued to deflate this week, with Microsoft, Adobe, Netflix, Apple, and Amazon recording significant losses. Tesla stocks, one of the market’s favorites, have also collapsed as CEO Elon Musk sold another $906.5 million in shares. The speculative meme stock bubble has also popped. On Monday, GameStop and AMC Entertainment were hardly hit by a broader market sell-off as top investors massively dumped risky stocks and repositioned their portfolios to safe havens.
GameStop, the main attraction of the meme stock mania, plummeted by 30%, while shares of AMC hit their lowest level since June, dropping by more than 31%. Several other names that have been popular amongst Reddit’s WallStreetBets investors have faced steep losses as well amid the overall risk-off sentiment and higher volatility. “The large-cap names are now starting to fall by the wayside, which is exactly what happened in 2018, the last time we had sort of that rolling correction idea,” Morgan Stanley chief investment officer Mike Wilson explained.
To make things even worse, yesterday, the Federal Reserve ditched the “transitory inflation” narrative, and admitted that the inflation outlook is much more alarming than previously expected. That’s why Federal Reserve Chair Jerome Powell announced that the central bank will issue three interest rate hikes until mid-2022, the first one starting next week. But instead of triggering an irreversible meltdown, the announcement actually sparked a melt-up, with investors in total denial still trying to push the collapsing bubble higher.
Several agencies, firms, and market watchers are warning that the Fed’s turbo taper is about to trigger much more chaos in the coming weeks. On a recent note to clients, Morgan Stanley’s Michael Wilson warned that “the Fed’s pivot to a more aggressive tapering schedule poses a larger risk for asset prices than most investors believe”. Wilson said that the rolling correction that has already begun continues under the surface, and makes spiking indexes ”a very bad gauge of the overall health of the stock market, or the economy, in our view.”
The most worrying warning, however, came from Bank of America. The bank’s latest weekly report suggested that a dot-com-style crash of big tech stocks is coming on the heels of the Fed rate hike, and investors should start selling right now before this massive bubble burst wipes out all the gains for good. “Investors should sell the rally in stocks ahead of upcoming Fed interest rate hikes,” Bank of America’s analysts wrote on a note released Friday. The bank also highlighted the striking similarity between today’s market conditions and the unwind of the tech bubble burst during the 2000 dot-com crash.
Bank of America’s Chief Investment Strategist Michael Hartnett said that this week’s “recovery rally represents an opportunity for investors to sell ahead of an upcoming Fed interest rate shock”. He expects the Fed to aggressively raise interest rates, shocking those who don’t see it coming. For that very reason, Hartnett recommends investors “‘sell the rip’ rather than ‘buy the dip’ in stocks as interest rate hikes are about to rock Wall Street, and amid a strikingly similar unwind in tech stocks compared to the dot-com bubble in 2000,” he wrote. “The bubble in speculative froth has popped,” the Bank of America’s strategist warned.
So, as you can imagine, with inflation soaring to the highest level in 40 years, the Fed is going to be forced to drive a liquidity crunch like no other. And soon, the whole market will start to freak out about it. This is the first time in nearly a decade that the market will have to say goodbye to all that excess liquidity that made it hit one record-high after the other despite the worsening economic fundamentals.
The possibility of an 80% drop is growing by the day, and with retail investors putting all their capital on the table and boosting the bets with margin and leverage, we might be headed to the biggest wealth loss event of the century, as the legendary investor, Jeremy Grantham, has cautioned months ago. Timing is everything in a stock market crash and ‘hell is the truth seen too late’. That is to say, when investors choose to ignore the risks and lose the chance to preserve their capital, they end up losing everything. So we all must start getting ready right now!
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