- The S&P 500 index has lost 21% since the start of the year. Similar declines have rarely occurred in wartime or Great Depression history.
- Analysts say the exchanges have just entered the “bear market” and Monday’s quote confirmed the bear market
- The pogrom is not only in stocks, but also in cryptocurrencies
- Rising interest rates divert capital to bonds and also to the dollar
- You can find more information on the Onet homepage
In addition to the Saudi stock exchange and the Indonesian coal exchange, stocks are plunging sharply around the world. The key index of the New York Stock Exchange, the S&P 500, lost 3.9% on Monday, dropping below 3,750 points at the end of the day. Since the beginning of the year, it has already lost 21.3%. your value.
The last time during the same period, a larger decrease was in 1962, that is, the year of the Cuban crisis, when the United States was to start a nuclear war between the United States and the USSR, that is to say the third world war, before that during the world war. II in 1940, and even earlier in the Great Depression of 1932. This set of dates shows just how crucial a moment we are and how panicked is the withdrawal of capital from risky assets in the world’s largest economy. world.
As CNBC points out, the S&P 500 index, which shows the performance of America’s 500 largest companies, is back in “bearish territory.” It ended Monday’s trading session over 20%. below the January record, co confirms bear market for many Wall Street analysts.
See also: What are the characteristics of the bear market and how to invest in it?
Theoretically, nothing bad is happening in companies yet. Last year was the best for the US non-financial sector (excluding banks, insurers, investment firms, etc.) in terms of profits since 1950. Companies earned $2.8 trillion. clean, i.e. 25%. more year after year. There could be a high dividend for that. The net profit margin was as high as 13 percent.
The first quarter of this year. It’s also hard to call it bad, because although US corporate profits before taxes fell at an annualized rate of 2.3%. compared to the previous quarter, year-on-year, they were already 12.5% higher.
The problem is that the markets are currently haunted by inflation. AND next to the slogan “inflation”, investors always see the slogan “interest rate”.
Prices rising for inflation
In Poland, we had a 24-year high in May and inflation of 13.9%. y / y, but in the United States there is a 40-year high and an 8.6% price increase. yy. In Poland, the main NBP rate increased to 6%. with 0.1 percent in September of last year In the United States, the cycle of rate hikes only started in March, then there was an increase in May to 0.75-1.0 %. The Fed’s next decision will be announced on Wednesday, March 15.
After inflation readings for May, released last Friday, the CME futures market assumes 68%. probability of an increase in the main rate to at least 3.5-3.75%. in December of this year.
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– The open question is whether this is not too much, given that there will be concerns about a stronger slowdown in the US economy. Consumer sentiment data for May was the weakest since the 1950s. Therefore, the key topic of the week will be what the Fed shows in the release next Wednesday night. Since this is a June meeting, we will also see new macroeconomic projections. The market will seek confirmation of the new aggressive projection of the movements of the American Federal Reserve – assesses Marek Rogalski, the main currency analyst at DM BOŚ.
What does this potentially aggressive Fed policy mean for the stock market? As far as corporate profits are concerned, the banking sector will certainly benefit as loan repayments will increase. But the real economy – the so-called non-financial sector – will lose, as the costs of financing activities will increase. From credits you will have to pay more than 5 percent. or even more interest per year instead of the recent 2%. for large companies.
For example, Apple, the most valuable company in the world today, earning billions of dollars from the sale of smartphones, has liabilities of $283 billion. Each percentage point of interest on these bonds could ultimately result in a payment of $2.8 billion. annually. And it is estimated that the rates will increase to 3.5-3.75%, that is, the total additional cost could even reach 10 billion dollars. annually. That’s one-ninth of Apple’s record profits from last year. ($95 billion) and about one-sixth of the profits of the previous three years ($55-60 billion).
With the exception of banks in the case of WIG20 companies, Grant Thornton calculated that if interest rates had been at their current level a year ago, that would have meant loss of PLN 4.7 billion or 9.1% annual profit. These are estimates only for variable-rate debt and do not take into account hedging instruments against an increase in interest rates.
For the most indebted Polish non-financial corporation, namely PKN Orlen, the interest rate has risen by 6 percentage points so far. this could mean a hypothetical loss of up to PLN 4 billion per year, if the entire debt had a variable interest rate and the entire loan was in PLN. That would be no less than 34 percent. earnings for the last four quarters.
An alternative on the bond market
The increase in companies’ financial charges is not enough. The stock market is just one option for investing capital, another is the government bond market. Their interest rate from near zero levels begins to grow dynamically. Now passive investors (those who buy and only wait for interest/dividends) instead of relying on a few percent of corporate dividends, are redirecting their interest to government debt securities.
The average dividend yield for S&P 500 companies, even after declines, is just 1.65%. share value, and in the case of WIG20 – 2.4%. Meanwhile, the yield on US 10-year debt securities broke the 3.4% level in the past few days. for the first time in 11 years. Polish bonds are heading for a return of 8%. and these are the highest levels in 24 years. In this situation, keeping money in stocks becomes less “competitive” than in bonds.
Cryptocurrencies are two trillion dollars thinner
Capital outflow from stock markets also applies to other risky assets. Including the most risky, that is to say crypto-currencies, values made of “digital air”.
The market value of all 9,993 cryptocurrencies worldwide fell to $945 billion on Tuesday. At the peak of November 9, last year was $2.94 trillion. In other words, in just seven months, $2 trillion or two-thirds of the market’s value has gone out of this market.
The price of the largest cryptocurrency, namely bitcoin, fell from 67 thousand. 567 $ in August last year to the current 22 thousand 487 $ Only this year it has decreased by 52%. of which last week by 30 percent. in dollars. Whoever bought bitcoin a year ago and holds it to this day suffers heavy losses. Those who purchased before December 2020 still benefit, but how long will this condition last?
Of course, there are ratings. JP Morgan, comparing the liquidity of bitcoin to the liquidity of gold, valued bitcoin at 38,000 a few months ago. hole. indicating that the liquidity will be four times that of gold. The point, of course, is that bitcoin cannot be made into jewelry and has no industrial use. Formally, it’s just a string.
Flight to the dollar in a debt crisis
With rising US interest rates and the reluctance of the European Central Bank to raise them in the euro zone, capital is fleeing to the “dollar world”. The US currency appreciated 2.6% last week. against the euro and this year it is already 9%. The euro is currently trading at 1.04 against the dollar on track to reach one-to-one parity, last recorded in 2002.
Along with the Fed’s rate hike, investing money in the United States begins to earn interest, which cannot be said of investing in euro debt securities. The main ECB rate is not expected to go above zero until September this year, and until June 23, euro reprints are still underway, aimed at buying bonds, mainly government bonds.
What else, bond yields also from eurozone countries have recently risen sharplyand since interest rates haven’t risen yet, that means they’re selling them below par, expecting securities with interest soon. Quotes show that investors are expecting more than 1.5% in German bonds. interest, although in March of this year. not only did the banks not rely on interest, but they even paid extra to have these bonds.
The question is whether the rise in yields of some eurozone countries will not be a source of financial problems. According to Eurostat data, at the end of last year Greece had a debt of 193%. GDP, which means that the interest rate on 10-year securities will increase this year from 1.3 to 4.4%. over time, this will cut off up to 6% of GDP, or tax increases will have to be raised to fund interest repayments.
In the case of Italy, the debt is 150.8%. GDP with an interest rate variation of 1.2 to 4.15% currently. could ultimately weigh on the economy at a cost of 4.4%. GDP. More than 100% Spain, France, Belgium and Cyprus also have GDP debt.
– Italian bond yields are starting to pose a problem for the eurowhich will intensify concerns related to the fragmentation of the European debt market after the expiry of the support of the ECB, which was the purchase of assets, indicates Marek Rogalski.
This creates a risk for the euro and encourages a move towards the dollar. The United States also has a high level of debt, since the end of March of this year. was nearly 125%. GDP, but in the case of the euro zone, the problem is the number of countries that can run into difficulties and upset the single currency system.
Author: Jacek Frączyk, journalist at Business Insider Polska