Investors around the world recorded billions of dollars in losses in stocks, commodities and cryptocurrency as markets cracked on a wave of sell-offs.
The US NASDAQ, S&P 500, two of the world’s major indices fell to their lowest levels since March 2020 just before the pandemic, falling sharply by 2.7% and 1.9% on Friday. The NASDAQ, which hosts mostly tech-related stocks, is down 11.9% this year, while the broader S&P index which hosts some of the biggest companies in the US is down 7.73 %.
Elsewhere on Friday, the UK’s FTSE 100 fell 2.07%, China’s Shanghai Composite Index fell -0.91%, Japan’s Nikkei Index fell -0.92% and the Global Dow Jones Index too. -1.45%. The sell-off also extended to cryptocurrency markets, with 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 result of an intertwined series of events that have occurred since the Covid-19 lockdowns came into effect in March 2020.
Why the accident
To understand why we are in a bear market, we must first explain what created the bubble in the first place. Nairametrics believe there are three main reasons which have also inadvertently led to the crash we are experiencing.
Interest rate – The first causal factor and perhaps the most poignant is the interest rate. For the last decade (yes before Covid-19), the western world has had a very low interest rate regime which meant that the strongest economy in the world was flooded 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 help build the habit of relying on financial leverage to finance investment activities.
- The problem, however, is that when interest rates rise, investors are forced to scale back their asset purchases, which negatively impacts value.
- And so, with inflation hitting 7% two weeks ago, the US Fed decided enough was enough and doubled down on its plans to raise interest rates within months. Investors are reacting negatively to this news, leading to the sell-off we are currently experiencing.
helicopter money – Following the global Covid-19 pandemic that crystallized in early 2020, governments around the world responded with a host of economic programs that pumped cheap money into the global economy.
- The United States under President Trump and now Joe Biden has injected more than $6 trillion in stimulus packages into the United States, including cash distributions to American citizens.
- While this was intended to save economic growth amid the recessions triggered by Covid-19, it had a side effect, one of which has been cited below as inflation.
- Another major side effect was fueling a bubble in the retail sector of the stock market that sent financial asset prices to all-time highs as investors ignored fundamentals to seek capital gains across the board. asset classes.
Inflation – One of the first measures taken by governments around the world to deal with the Covid-19 pandemic was to close borders and reduce restrictions on movement. This created a major logistics bottleneck and a large gap in demand, forcing companies to reduce inventory as demand declined.
- This then had a major effect on the supply chains across the world such as ships, air travel and other transportation services which effectively facilitate global trade across the globe in a state of flow. With supply shortages aplenty, it was only a matter of time for this to have ripple effects on the prices of goods and services.
- As countries around the world opened up their markets, demand rose but lagged behind global supply, forcing a rise in the rate of inflation. At first, central banks around the world thought it was transitory only to find out later that it was persistent inflation with no chance of fading away soon.
- To make matters worse, world leaders pumped billions into stimulus packages, some of which fueled demand faster than supply could meet.
The effect of all of the above causal factors is a market implosion exacerbated by a combination of profit taking, panicked investors seeking to exit the market and lenders calling on their facilities.
- Investors who made money from the 2021 bull run are withdrawing their funds en masse in hopes of avoiding the latest selloffs wiping out their profits. As expected, when everyone is taking profits, there are more sellers than buyers driving prices down.
- We also understand that most investors who have given their money to fund managers have requested a withdrawal, also to avoid further loss in the event of a stock market crash.
- Managers of mutual funds, ETFs and index funds are seeing a major outflow of their money from institutional investors, HNIs and retail investors, fearing this could be a very bad downturn for global markets . Nobody 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 also require their borrowers to post collateral to cover their positions or call their loans outright. It also forces borrowers to sell so they can close their positions with their lenders or also repay the loans.
What we are experiencing now is a combination of many factors that first triggered an asset bubble and then increased the rate of inflation before forcing central banks to raise interest rates cascading to the massive sell-offs we currently know. This is why the market is collapsing and we believe this could just be the start of a very dark period for investing in foreign stocks and cryptocurrencies.
- Currently, Nigeria does not seem to be affected by the massive sales going on in the market. Nigerian equities are at a 13-year high and the fixed-income market is still offering double-digit returns. We also have our inflation problems and have learned to live with the effects of negative real returns.
- It may be a blessing in disguise, but we’ll never know. For now, Nigerians, especially the millions of young Nigerians exposed to foreign equities, will be hit hard. Some of them have their savings on financial assets and depend on them to survive.
- A prolonged bearish period with realistic returns and not the 2x, 3x they have grown accustomed to could have a major impact on their lifestyle and source of income.
For now, CASH IS KING! as we continue to observe the situation.