Surging interest rates started it, but something else has taken over – and now, mysterious but powerful forces are compounding the pain of the stock market rout.
There are some obvious explanations for this. To start, software is the new oil sector, and the S&P 500 is now heavily weighted to tech stocks. Stalwarts such as Apple Inc. and Amazon.com Inc. have grown so large they comprise roughly a quarter of the index. The Federal Reserve Bank of St. Louis, a regional branch of the U.S. central bank, tracks the value of the Wilshire 5000 – a broad measure of the total U.S. stock market value – relative to U.S. gross domestic product. In 2000, at the height of the dot-com boom, the stock market’s value was about 1.4 times U.S. GDP. The ratio then sank and took about 20 years to climb back to that level.
Margin debt is a measure of how much money has been borrowed for investing purposes. By October, 2021, American investors had borrowed US$936-billion to put into the market, up 72 per cent from February, 2020, and far above the historical average. With interest rates rising, the cost of borrowing this money to invest is getting more expensive.
As for the tech stalwarts, earnings growth is slowing, as seen with Amazon this week. “Expectations looking ahead are for another deceleration in growth in the second quarter, as well as a likely long-awaited hit to profit margins,” Charles Schwab chief investment strategist Liz Ann Sonders wrote in a note to clients.
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