Markets Are In A Risk-off Mode: That Spells Opportunity

Close up of the Wall Street sign with the American flag in the background
Credit: Carlo Allegri - Reuters /

For most of the last twelve months, investors were ebullient and willing to indulge their risk appetites. This was evident in the meteoric rises of technology stocks, the runup of cryptocurrencies like Bitcoin and Ether, the billion-dollar valuations of pre-revenue companies debuting on public markets via SPACs, the surging performance of IPOs, and of course, in the speculation around Gamestop (GME) and Dogecoin (DOGE). 

Across every corner of the market, a risk-on mentality predominated. Now, investors are singing a different tune.

Take the technology stocks that soared during lockdown and before the vaccine rollout. After hitting a high of over $568 last October, Zoom Video Communications (ZM) is down by almost 50%, hovering around $320. Other pandemic darlings, like Etsy (ETSY) and Shopify (SHOP), are down from their all-time highs by around 30% and 18%, respectively. Tesla (TSLA), the ultimate pandemic beneficiary, is down about 35% from its record high. 

The cryptocurrency sector is also bruising, as this week’s dramatic plunge demonstrated. Bitcoin (BTC) fell by over 30% in just 24 hours; priced at about $40,000, the largest cryptocurrency is about 36% off its all-time high. Ether (ETH), the second largest crypto asset, is about 33% off its own record high (which was set earlier this week). The sell-off appears to have been driven by several factors -- Elon Musk’s sudden bearishness on Bitcoin, the Chinese government banning bitcoin transactions, US financial regulators expressing crypto skepticism -- all of which decreased appetite for risky crypto bets.

The SPAC boom, meanwhile, is fading. A representative sampling of companies that recently merged with SPACs has trailed the S&P 500 by 15 percentage points over the same time period, according to a Reuters analysis. Some of the highest profile SPAC deals are especially hurting. For instance, the stock of electric vehicle maker Lucid Motors (CCIV) is down over 65% from its February high. 

Even the robust IPO market is slowing down. The Renaissance IPO exchange-traded fund (IPO), which tracks companies that recently went public, is down about 23% from its peak. The same goes for recent IPOs: the web hosting firm Squarespace (SQSP) went public this week, but its shares still trail its $50 reference price. Coinbase (COIN) is down as well.

Some market observers believe these setbacks are an appropriate correction after a prolonged period of market euphoria. Others believe they are signs of a larger stock market bubble on the verge of bursting. Investors best think hard about which scenario is true -- getting it right could mean capitalizing on an immense upside. 

If these market movements are just a correction, then now is a great time to get in on stocks and cryptocurrencies that were battered the last few weeks. The potential upside is not just to reclaim prior highs, but to achieve fresh records as consumer spending grows in the post-pandemic economy. 

If, however, these recent struggles are signs of a broader bubble waiting to pop, then investors would do well to double down on stocks like financials and utilities that struggled during the pandemic, but which are primed for success as the pandemic recedes from everyday life. 

To be sure, risk-off sentiment is dominant right now. But as we saw last spring, the investor appetite for risk is hard to suppress.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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