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.
At the same time, central bankers from Canada to Europe are about to test the resilience of global markets as they follow hawkish US policy makers on a liquidity-sapping mission to unwind the pandemic bond-buying spree.
That’s the broad outlook for Wall Street and beyond, according to the most-popular responses from 687 contributors to the latest MLIV Pulse survey, as the Fed this month starts reducing its asset holdings in a process known as quantitative tightening.
The historic shift is seen as a notable threat to tech equities and digital tokens -- both risk-sensitive assets that soared in the Covid-era market mania before cratering in this year’s cross-asset crash.
The era of ultra-cheap 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.
All this comes against the risky backdrop of the Fed hiking interest rates at the fastest pace in decades to combat red-hot inflation, as officials seek to quash talk of a September pause.
Recent gyrations in stocks, bonds and other markets have done little to deter the US central bank from its hawkish posture, with policy makers widely expected to raise rates by another half point on June 15. The Fed began shrinking its balance sheet this month by allowing assets to mature without reinvestment at a monthly pace of $47.5 billion, increasing to as much as $95 billion per month in September.
“It’s where that quantity of capital and quantity of liquidity has been most beneficial that its withdrawal is going to continue to be felt -- and that is in the most speculative parts of the market,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said on Bloomberg Television.
The MLIV survey of most-at-risk assets in the QT era canvassed a group ranging from retail investors to market strategists. Just 7% picked mortgage-backed bonds -- securities that were at the heart of the 2008-09 meltdown -- with almost half citing tech and crypto.
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 end of Fed bond-buying also forces the Treasury to sell more debt in the open market, potentially putting upward pressure on bond yields, which play a big role in how Wall Street values listed companies -- a headwind for so-called growth stocks in particular.
Fueled by pandemic-era policy easing, the tech-heavy Nasdaq 100 Index climbed more than 130% from its March 2020 low before plunging this year. Futures on the gauge climbed 1.3% before the open on Monday.