The Cambridge Weekly – 16 May 2022

Bear market fear as another tech bubble deflates

To some investors it will seem the old investor adage of ‘Sell in May and go away’ has once again proven correct, especially when the US S&P500 fell within touching distance of that bear market threshold of -20% last week. However, what makes this particular market  correction different to others experienced since the pandemic, is that it has disproportionally affected those risk assets considered safe havens when economic growth prospects faltered – namely US tech mega caps, and other tech names quoted on the NASDAQ.

The crypto fever breaks

A new technology excited the masses. Investors were stirred to action by the endless possibilities – and the fear of missing out on them. After the initial trailblazers soared, newer offerings sprung up every day and rapidly grew in price. But eventually, investors started to question what they were really buying into. What were the great promises of change and disruption based on? Fear spread that the answer was nothing at all – a mixture of impenetrable jargon and bravado, that somehow managed to build multi-million-dollar enterprises on sand. Panic ensued and markets crashed – and not just those involved in the new tech. The fallout threatened the wider economy and stripped a fledgling industry to its bones.

As QT unwinds QE – how worried should investors be?

We have noticed an astounding trend in the Fed’s liquidity management recently. Now ready to embark on a full quantitative tightening (QT) mode, cuts to the balance sheet have been high on the agenda. But less well-reported are the reverse repurchase agreements (repos) that the Fed has been using since last summer to take liquidity out of markets. Reverse Repos held with the Fed – whereby it sells an asset under an agreement to buy it back after a short period of time – reached an all-time high in April.