Investors across the world recorded billions of dollars of losses in stocks, commodities, and cryptocurrency as markets cratered on a wave of massive sell-offs.
The US NASDAQ, S&P 500, two of the world’s leading indexes fell to their lowest levels since March 2020 just before the pandemic, falling sharply by 2.7% and 1.9% on Friday. NASDAQ which mostly hosts tech-related stocks is down 11.9% this year while the broader S&P index that hosts some of the largest companies in the US is down 7.73%.
Elsewhere on Friday, the United Kingdom’s FTSE 100 fell 2.07%, the Chinese Shangai composite index -0.91%, the Japanese Nikkei index -0.92%, and the Global Dow Jones Index also down -1.45%. The massive sell-offs also extended to the Cryptocurrency markets with the flagship Bitcoin falling below $36,000 for the first time since July 2021. Ethereum is also down, below $2,500 for the first time since April 2021. Bitcoin and Ethereum are now down 21% and 30% this year alone.
The crash we are currently experiencing is the outcome of a series of intertwined events that have occurred since Covid-19 lockdowns took effect in March 2020.
Why the crash
To understand why we are in a bearish market, we need to first explain what created the bubble in the first place. Nairametrics believes there are three major reasons which inadvertently also gave way to the crash we are experiencing.
Interest Rate – The first causative factor and perhaps the most poignant is the interest rate. Over the last decade (yes before Covid-19) the western world has been operating a very low-interest rate regime which meant that the world’s strongest economy was awash with cheap money.
- Most of these cheap funds found their way into the US and global stock market fueling asset prices beyond their usual fundamentals. Cheap funds also enable a habit of relying on financial leverage to fund investment activities.
- The issue, however, is that when interest rates are raised investors are forced to cut back on their asset buying, impacting negatively on value.
- And so, with inflation hitting 7% two weeks ago, the US FED decided it has had enough and doubled down on its plans to increase interest rates in a matter of months.
- Reports indicate interest rates could be raised three times this year. In fact, a Jp Morgan CEO predicts a 6-7x interest rate hike to combat inflation.
- Investors are reacting to this news negatively leading to the sell-offs we are currently experiencing.
Helicopter Money – Following the global Covid-19 pandemic which crystallized in early 2020, governments across the world responded with a slew of economic packages that pumped cheap money into the global economy.
- The United States under President Trump and now Joe Biden injection over $6 trillion of stimulus packages into the US including cash handouts to American citizens.
- Whilst this was targeted at rescuing economic growth amidst the Covid-19 triggered recessions, it had a side effect, one of which was cited below as inflation.
- Another major side effect was fueling a bubble in the retail end of the stock market that sent financial assets prices into all-time highs as investors ignored fundamentals to pursue capital gains across asset classes.
Inflation – One of the first actions governments across the world took to address the Covid-19 Pandemic was to shut out borders and reduce the restriction of movement. This created a major logistic log jam and a major gap in demand forcing businesses to cut down inventories as demand waned.
- This subsequently had a major effect on supply chains across the world such as ships, air travel, and other transportation services that facilitates global trades across the world effectively in a state of flux. With supply shortages abound it was only a matter of time for this to have ripple effects on the prices of goods and services.
- As countries across the globe opened up their markets, demand ticked up but lagged global supplies forcing a rise in the inflation rate. At first, central banks across the world thought it was transitory only to discover later that this was sticky inflation with no chances of leaving soon.
- To make matters worse global leaders pumped in billions of dollars in stimulus packages some of which fueled demand faster than supply could meet.
Source: WSJMarket Implosion
The effect of all of the causative factors above is a market implosion exacerbated by a combination of profit-taking, panicky investors looking to get out of the market, and lenders calling on their facilities.
- Investors that have made money from the bullish ride of 2021 are pulling out their funds in droves hoping to avoid the latest sell-offs from wiping out their profits. As expected, when everyone is taking profits, then there are more sellers than buyers forcing prices down.
- We also understand most investors who have given their money to fund managers have been requesting a withdrawal, also to avoid losing more in a market crash.
- Managers of Mutual Funds, ETFs, Indexed Funds are experiencing a major outflow of their money from institutional investors, HNI, and retail investors afraid that this could be a really bad downturn for global markets. No one wants to be the pig in a fight between bulls and bears.
- Finally, margin lenders who lend money to investors in the stock and crypto markets respectively are also asking their borrowers to post collateral to cover their positions or outrightly call back their loans. This is also forcing borrowers to sell so they can close their positions with their lenders or also pay off the loans.
Bottom Line
What we are currently experiencing is a combination of many factors that first triggered an asset bubble and then increased inflation rate before forcing central banks to raise interest rates cascading to the market sell-offs we are experiencing currently. This is why the market is crashing and we believe this could just be the beginning of the very dark period for investing in foreign stocks and cryptocurrencies.
- Currently, Nigeria seems to not be affected by the current market sell-offs. Nigerian stocks are at a 13 year high and the fixed income market is still delivering double-digit yield. We also have our inflation challenges and have learned to live with the effects of negative real returns.
- Perhaps this is a blessing in disguise, but we will never know. For now, Nigerians, especially million of young Nigerians with exposure to foreign stocks will be badly affected. Some of them have their life savings on financial assets and depend on them to survive.
- A prolonged bearish period with realistic returns and not the 2x, 3x they have come accustomed to, could have a major impact on their way of life and source of livelihood.
For now, CASH IS KING! as we continue to observe the situation.
