The speculative darlings of the easy-money era — technology stocks and cryptocurrencies — are acutely vulnerable now that the Federal Reserve is shrinking its nearly $9-trillion balance sheet.
The era of ultracheap money looks over for now. The Fed’s balance-sheet drawdown is seen lasting more than a year, while nearly two-thirds of survey respondents say the four-decade bull run in Treasuries has come to an end. Draining money from the system tends to tighten financial conditions, all else equal, which acts as a brake on economic growth. That can reduce valuations for tech stocks given their reliance on optimism about future profits.
The thinking goes that when money is cheap, traders can speculate about future digital trends en masse. But when the liquidity party fades, those bets become more costly.“I don’t think people fully realise how much QE caused investors to add a lot of leverage to their positions,” said Matt Maley, chief market strategist for Miller Tabak + Co. “Now that we’re going through QT, that leverage has to be unwound.
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