Crazy swings on Wall Street

Wild swings in the price of major tech stocks on Wall Street last week point to continued turbulence in financial markets as central banks begin raising interest rates in response to rising inflation.

The fluctuations were highlighted by the stock price movements of Meta (Facebook’s parent company) and Amazon. On Thursday, Meta lost 26.4% of its market value, $230 billion, the biggest one-day loss in history.

The floor of the New York Stock Exchange, Wednesday, November 3, 2021, as stocks open slightly lower on Wall Street. (AP Photo/Richard Drew)

This was followed by a move in the other direction on Friday when Amazon shares rose 13.5%, adding $190 billion to its market capitalization, to post the biggest market gain ever by a company. .

Summarizing the sense of bewilderment among market experts, the wall street journal columnist James Mackintosh wrote: “Uncertainty about the future of the economy in general and the tech sector in particular is (sic) extremely high. In short, no one knows anything.

The immediate cause of Meta’s dramatic decline was the revelation that Facebook is losing TikTok followers among young people. Additionally, changes Apple has made to how its apps are used, making it harder for Facebook and others to target ads, are expected to cost it $10 billion in 2022.

Meta’s loss in market value was equivalent to the total market value of major chipmaker Intel and greater than that of McDonald’s.

After gains in the first three days of last week, the S&P 500 index fell 2.4%, its biggest drop since February last year, taking its decline for 2022 to 6.4%. The market then rose slightly on Friday to record its best week of the year but could well fall again this week.

Last week’s swings weren’t limited to Meta. Another social media company, Snap, also fell 23% on Thursday due to changes to Apple’s policy. It then rebounded 50% in after-hours trading after announcing its first-ever quarterly profit and saying it was making progress in finding ways to weather the effects of Apple’s new policy.

Apple’s changes were introduced last April when it modified iPhone software to require apps to ask users if they wanted to be tracked. The effect of this decision is to limit the ability to collect data through apps used to target advertising.

Other companies that have been hit by large swings in their stock prices include Netflix, due to the rise of other online streaming services, and PayPal.

One of the main reasons for the violent fluctuations of high-tech companies, produced by relatively minor changes in their economic environment, is that much of the investment in them is highly speculative. Their stock value is not based on current returns – often they only make small profits or even a loss – but on expectations of what they will do in the future. Thus, small changes in their outlook can produce large swings in their stock price.

Conversely, one of the reasons for Amazon’s stock to rise, after experiencing a significant 8% decline, was rising subscription rates for its Prime streaming service and the belief that it could contain rising costs of labor and other inputs.

A major factor in the rise and rise of tech stocks over the two years of the pandemic has been the continued flow of ultra-cheap money from the Fed, which has more than doubled its holdings of assets since March 2020 per from the already record high of $4. just under $9 trillion.

But with inflation on the rise – it’s now around 7% in the US and over 5% in the UK and the eurozone – central banks are preparing to tighten monetary policy. This is to try to suppress workers’ wage demands to compensate for the large real income losses suffered over the past two years and the additional losses to come as inflation accelerates.

Shares of technology companies, which have been among the main beneficiaries of the influx of cash, are now very sensitive to indications that they could be withdrawn, even to a limited extent.

This has implications for the market as a whole. As an article in the FinancialTimes over the weekend asked, “Heavy tech stocks have walked investors to the top of a really big hill. Are they about to bring them back down?

He pointed out that together the 10 largest stocks in the S&P 500, most high-tech based, accounted for about a third of the index’s total market capitalization, “well above the observed concentration. during the previous peak of the tech bubble”. of 2000.”

There are other signs of growing instability. The FT reported that the “huge swings” in stocks such as Meta, PayPal and Snap indicate “what investors say is a dramatic decline in the ability to trade large lots of stocks”.

This trend is a sign of declining liquidity, i.e. the ability to buy and sell an asset, sometimes in large quantities, without having a major impact on the price due to the size of the market. .

Patrick Murphy, a partner at global trading firm GTS, told the FT: “Intraday liquidity has dried up so much. I haven’t seen anything like it since March 2020.”

At that time, financial markets were entering their most significant crisis since 2008, with the US Treasuries market suffering a total freeze that led to massive Fed intervention.

Rocky Fishman, a Goldman Sachs strategist, told the paper that liquidity had weakened “substantially” and “poor liquidity…leaves the potential for outsized market moves.”

Another sign of growing nervousness is the rise in purchases of credit default swaps which allow investors to insure themselves against the default of companies on their debts. They reached $197 billion in January, from $123 billion in December, to reach their highest level since March 2020.

Corporate debt, as well as the stock market, will be strongly affected by the ongoing monetary tightening by central banks.

US inflation data this week is expected to show prices continuing to rise at more than 7%. The Bank of England last week raised its base rate by 0.25 percentage point, with four of the nine members of the Governing Council voting for a 0.5 percentage point increase, as inflation in the UK UK is expected to exceed 7% in April.

The European Central Bank did not raise its base interest rate at its meeting last Thursday, despite inflation at over 5%. But ECB President Christine Lagarde adopted what was described as a “hawkish” tone during her press conference, refusing to repeat earlier assurances that interest rates would not rise in 2022.

In a weekend op-ed, titled “Interest Rates May Need to Rise Sharply to Fight Inflation”, the Economist noted that with global debts now standing at 355% of GDP “businesses and households were more sensitive to even small rate hikes” and “fighting inflation could plunge the world into a meltdown”.