Pressure is stacking up on technology companies, wiping out billions in market value. This volatility will likely contribute to a risk-off market attitude.
- On Thursday, Meta (Facebook) stock lost more market value in a single day than any American company in history.
- While U.S. investors poured into technology stocks, cryptos, and NFT’s, central banks were stacking up on gold. Should we pay attention?
- Gold remains in its consolidating wedge pattern, waiting for a pivotal piece of news that will finally break it out of the $1,800 zone.
Meta loses $230 billion
Well, I guess the rebrand wasn’t enough. Facebook’s parent company, Meta Platforms Inc., plunged 28% on Thursday. The sell-off erased $230 billion of value from Facebook’s market cap, setting a record for the most value lost in a single day by any U.S. company.
Seems harsh for a single missed earnings report, but investors are beginning to see the writing on the wall. The Federal Reserve is moving fast to raise interest rates, which damages the lofty values placed on technology stocks.
Investors place a multiple on company earnings to “fairly value” the company’s stock. When interest rates are low, the investors accept a higher multiple. However, when they rise, investors start demanding more ownership for the same share of company profits. In response, the stock price must drop.
Facebook isn’t the only loser
Meta is taking all the headlines, but they are far from the only technology company feeling the Fed’s bite. PayPal, Spotify, Amazon, Snap, and Pinterest are all dropping fast to pre-pandemic levels.
Technology stocks soared during the pandemic because of free money, rock-bottom interest rates, and an extremely optimistic outlook on future economic growth. Investors suffering from “grass is greener” syndrome only helped pump these stocks higher. The more free money that was pumped into these high-fliers, the more stock prices swung away from economic reality.
Cathie Wood’s ARKK Innovation ETF, which invests in popular names in disruptive innovation such as Tesla, Zoom Video Communications, Roku, and Coinbase, soared nearly 400% from the March 2020 bottom. After peaking in early 2021, the fund has lost 60% of its value.
Central banks stack up their gold
Individual investors aren’t the only players in the market. Sometimes it is helpful to look at other investors – especially those who have authority over the economy. And you might have guessed, central banks were not stacking up on technology stocks, cryptocurrencies, and NFT’s during the pandemic. They were stacking up on gold.
Global central banks purchased 463 tons of gold in 2021, 82% higher than the 2020 total. This demand brought central bank gold reserves to a 30-year high. Isn’t it interesting that while the world’s top economic policymakers were engaging in the most accommodative monetary policy in modern history, they were simultaneously stacking up on the world’s hardest currency? It’s almost like they know their history: money printing is a short-term game; gold is a long-term play.
The Insurance Policy
Let’s take a closer look at the asset that serves as an insurance policy for all this market insanity.
Gold is still in its consolidating wedge pattern. The 200-day and 50-day moving averages have converged around $1,800, which has served as magnet for the price for almost a year now. Gold has still not put in any higher highs, which we need to see to confirm any sort of bullish trend.
First, gold will have to break above the declining resistance line. Of course, there is a possibility that a stronger U.S. Dollar and rising real interest rates will push gold to a lower low, which would be a bearish signal.
However, considering the immense pressure on the stock market, we expect to see a risk-off market attitude supporting the price in coming weeks.
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As always, thank you so much for reading – and happy investing!