The year started very choppily for global stocks and digital assets, most of which have slumped in value, flirting with bear territory, while some have even completely crashed.
Stock charts for the year don’t look very good.
The S&P 500 is down 13.5% and the Nasdaq is down 23%. The once high-flying digital asset, Bitcoin, is down more than 38% (and other digital assets have dropped even further).
The growth-oriented Nasdaq index is always exposed to heavier losses than the broad market, as most of its components rely on high-growth prospects. These assets behave like long-term bonds in terms of reaction to interest-rate changes, as they have a long duration. This happens because most of their promised disbursements to investors occur way into the future (if at all), as opposed to high-dividend stocks.
Digital assets like Bitcoin and Ethereum are even more exposed to interest-rate risk, even though it’s rarely recognized by crypto traders. When the Federal Reserve starts hiking rates, growth stocks top the price declines. The chart below shows what’s going on this year so far.
As can be easily spotted, the loss accumulated by the Vanguard Russell 1000 Value (NASDAQ: $VONV) is pretty flat compared with the other assets, in particular with its sister fund, the Vanguard Russell 1000 Growth (NASDAQ: $VONG) ETF. While the growth fund has gone down by 22%, the value fund has managed to contain losses to 4.5%.
With inflation accelerating around the globe, Master Investor expects the Fed to continue hiking interest rates. Any surprises coming from the Fed would most likely, be negative, as the current level of interest rates is still very far away from what is usually considered a neutral rate.
Besides, to tame inflation, the Fed must tighten its policy to a higher level than the neutral rate, otherwise, inflation will continue rising above its desired level. Rising interest rates and inflation will sooner or later impact consumer behavior and reduce financial markets’ liquidity.
There are still many downside risks for growth stocks, as investors re-evaluate growth prospects. Recently, we saw some good examples reminding us that there are limits to growth. Meta (NASDAQ: $FB), the parent company for Facebook and Instagram, are racing to enter new markets as its core business is struggling.
Netflix (NASDAQ: $NFLIX) is also experiencing difficulties, losing subscribers daily. As far as the story goes, the culprit is the easing of lockdown measures, but time will eventually uncover some deeper problems with the company’s growth model.