Stocks Plummet as Market Awaits New Rate Increases
This past Friday, the stock market experienced its worst week since the coronavirus struck in March 2020. The Dow tumbled more than 900 points. The Nasdaq had its worst month since the 2008 crash. All three major equity indexes shed more than 2.7% to end an ugly week and month on Wall Street. Dread continues to mount as the true valuation of blue-chip stocks is being revealed in the face of a tightening economy.1
Market volatility has spiked amid concerns over whether tighter monetary policies from the Federal Reserve might derail the economy. The U.S. economy has already contracted for the first time since the second quarter of 2020. And these concerns are compounded by lingering fears over persistent inflation, geopolitical turmoil and an ongoing COVID outbreak in China.
The Fed is expected to raise interest rates on Wednesday by 50 basis points. They aim to tame inflation that’s been running at 40-year highs. The Fed will also detail plans to reduce the central bank’s balance sheet. It had swelled to $9 trillion during the pandemic. Their large-scale asset purchases were used to help stabilize markets during the COVID crisis. Traders of Fed-funds futures also see an 87% likelihood that the Federal Reserve delivers a 75 basis point rate hike in June.2
Market Valuations Take a Huge Bite Out of FANG Stocks
Analysts say Friday’s crash was a long-awaited re-valuing of stocks. Reality has set in that the Fed is likely to be less supportive of stocks and other assets going forward. The economy will have to kick its addiction to the extraordinary stimulus the Fed and Congress provided to counter the economic effects of the pandemic.
These new valuations hit the mega-cap FANG stocks with a vengeance. All four FANG stocks, Meta Platforms (FB), Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOGL), shed a collective $1.4 trillion in market value this year. It gets worse. An equal-weighted index of the four FANG stocks is now down 39% this year and 34% over the past 12 months.
“For years, a select group of megacap stocks propped up the market at large with huge outperformance and rising weightings,” said Bespoke Investment Group. “In 2022, though, those same stocks are now a major index drag, accounting for more than half of year-to-date large cap declines.”
Netflix is perhaps the best example. Shares of the online streaming company are down more than 68% this year. Losing two-thirds of your money on a stock isn’t what you normally expect from an $84 billion company. It’s important to point out, though, the company was worth nearly $267 billion just four months ago.
Alphabet is “only” down 21% this year. But when you’re talking about the S&P 500’s third-most valuable company, worth $1.5 trillion, that’s massive money getting wiped out. The value of Alphabet is down nearly $420 billion this year.
Shares of Amazon are down nearly 26% just this year. The company has erased north of $426 billion in market value following its disappointing first-quarter earnings release. That’s the biggest drop in market value this year among all the FANG stocks.
And this is a major issue for investors. With a market value of $1.3 trillion, Amazon remains the fourth most valuable stock in the S&P 500. And because of that, it’s a top holding for many of the key mutual funds and ETFs most investors own. Giant Vanguard is the No. 2 largest owner of Amazon.com stock, after founder Jeff Bezos.3
The days of stock prices being propped up by “free money” from the government are officially over. The true value of these mega-stocks is finally being revealed. Market volatility will most certainly increase as investors struggle to establish a new baseline. This will only be worsened by persistent inflation and a contracting economy. Safe haven assets are being sought as the economy grapples with this uncertainty. If you want to learn about securing your funds with safe haven assets, contact American Hartford Gold about a Gold IRA today.
Notes:
1. https://www.usnews.com/news/economy/articles/2022-05-02/markets-falter-ahead-of-pivotal-week-with-fed-set-to-raise-rates-aggressively
2. https://www.marketwatch.com/story/u-s-stock-futures-edge-higher-after-worst-month-for-equities-since-the-last-recession-11651483001
3. https://www.investors.com/etfs-and-funds/sectors/sp500-the-fang-stock-crash-is-costing-you-trillion-and-counting/
