Risk Bubbles Are Deflating Everywhere, Some Market Watchers Say

(Bloomberg) — For those concerned that the decade-long super-easy monetary policy has created asset bubbles around the world, the first signs of trouble may be in the making for inflated markets.

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To Bank of America strategists including Michael Hartnett, a bubble is “simultaneously popping” in assets including cryptocurrencies, palladium, long-duration technology stocks, and other historically risky areas of the market. The winding down in speculative areas comes as investors brace for the U.S. Federal Reserve to pick up the pace of policy tightening.

“The reduction in liquidity from the Fed will cause both the equity risk premium and interest rates to rise, which will continue to disproportionately impact the riskiest assets in the market including momentum-driven investments in money-losing technology stocks, meme stocks, and particularly cryptocurrencies, which have no intrinsic value,” according to Jay Hatfield, portfolio manager at Infrastructure Capital Advisors.

Here’s eight charts that show speculation draining out across various asset classes:

Ark Investment Management’s flagship Innovation ETF has fallen roughly 46% from its record high in February 2021. The hawkish signal from the Fed has hit expensively valued technology names hard, and many of those, including Tesla Inc. and Roku Inc., dominate Ark’s funds.

Speculation is also being drained from other riskier corners of the equity markets. A Goldman Sachs Group Inc. basket of unprofitable tech stocks has tumbled after a years-long run-up while an index tracking SPACs is down 35% from its highs.

“A potentially rising interest-rate environment is causing investors to re-assess the risk they are willing to take,” said Todd Rosenbluth, head of ETF research at CFRA. “Higher growth potential, yet less stable businesses are moving out of favor while investors prioritize more stable ones.”

Still, he’s not deeming any of the unwinding of these areas of the market as a bubble pop.

“I don’t like the phrase bubble because it is only obvious in hindsight” Rosenbluth added. “We’re in the middle of this trend and it might reverse course or might not.”

The Nasdaq Biotech index, which includes companies like Amgen Inc. and Gilead Sciences Inc., lost 6.5% in the first week of the new year, its worst five-day stretch since mid-March of 2020. Many members of the gauge have yet to generate sales or profits and have been affected by the investor rotation from high-risk, high-reward stocks.

Meanwhile, the Invesco Solar ETF, ticker TAN, saw an outflow of more than $70 million Thursday, the biggest since March of last year. The fund, which in 2020 posted a more than 230% gain, has lost its luster in recent days, as the Fed turns more hawkish.

Cryptocurrencies haven’t been spared from the speculative wash-out. Bitcoin had fallen about 40% as of late Friday after hitting a record high of nearly $69,000 in November. Ether, the second-largest cryptocurrency by market value, was down about 35% from its November highs.

The drawdown in Bitcoin “seems to be more driven by short-term traders and investors who regard BTC as a risk asset and tend to liquidate positions to de-risk their portfolios,” according to Noelle Acheson, head of market insights at Genesis Global Trading Inc. “Also, leverage in the market is not at excessive levels but had been building, which means that derivative position liquidations help to push the market lower.”

The weakness in technology and cryptocurrency is a double whammy for an exchange-traded fund that focuses on both of those industries: the Global X Fintech ETF. The fund- — which holds both upstart technology firms including Affirm Holdings Inc. and crypto-related companies like Coinbase Global Inc. — has dropped 30% since hitting a record in October.

Meanwhile, the Hang Sang Tech Index is down by roughly 50% from its highs in early 2021 as sweeping corporate regulations and fears of a housing bubble weigh on Chinese technology stocks.

Commodities have deflated as well. After a multi-year rise that sent palladium to a record-high in May, the metal has slid about 35%.

“What we’ve seen in the past when rates move up either through Fed rate-hike expectations being pulled forward or the 10-year moving up, it seems that tech and some of the growth models get hit more on the valuation side,” Jerry Braakman, chief investment officer and president of First American Trust in Santa Ana, California, said by phone.