Some of the hottest investments from last year are getting off to a rough start in 2022.
Crypto prices have tumbled, with Bitcoin down near $39,000 per coin — a far cry from the $68,000 high it saw in November — and Ether is struggling as well. Meme stocks, which started their frenzy about a year ago when everyday investors teamed up to make GameStop's price surge, are on a losing streak. GameStop's stock price is already down around 33% from the start of 2022.
Meanwhile, tech stocks are continuing their slump with the Nasdaq Composite, a tech-heavy market index, down more than 10% from its record close in November. Shares of streaming giant Netflix, for example, fell more than 20% Friday morning as investors took in the company's prediction of slowing subscriber growth. Amazon's stock price is down 13% from the start of the year, and Microsoft shares have slumped 9%.
What's going on?
The environment that allowed many of these investments to do well hinged on the Federal Reserve providing quantitative easing — a policy the central bank embraces to stimulate economic activity — and keeping interest rates at zero, says Matthew Tuttle, chief executive at Tuttle Capital Management. But the Fed has said it may raise interest rates sooner than earlier anticipated, so Wall Street has to reprice all those assets based on an entirely new environment.
“That repricing process gets really ugly and that’s what we’re seeing," Tuttle says.
In times of market uncertainty, which is what we're experiencing now, investors are less willing to pay up for investments they are hoping will do well in the future, says Sam Stovall, chief investment strategist at the investment research firm CFRA Research.
"In a market that is now becoming more risk-averse, these highly speculative stocks are losing their luster," Stovall adds.
What's next for stocks and crypto?
While investors may now be unwilling to take on significant risk, that won't always be the case. We've seen this with highly risky assets like crypto, as the prices can seesaw at dizzying rates. Just look at last year, when Bitcoin lost 50% of its value between April and July of 2021, before surging to an all-time high of above $68,000 in November.
Some experts are even predicting that Bitcoin will hit $100,000 per coin over the next few years.
Meme stocks are also difficult to predict, as they rely on something that you can't necessarily see coming: enough hype to get investors to buy in, like we saw with GameStop last year. However, a recent report from Apex Fintech Solutions did show that Gen Z investors may be turning their attention from meme stocks to stocks related to the "metaverse" (a broad term for technologies bringing together the digital and physical worlds), like online gaming company Roblox and Meta Platforms (formerly Facebook).
When it comes to tech stocks, remember this is not the first time they have experienced a scary drop, and it won't be the last. But ensuring that your portfolio includes a mix of other types of stocks, as well as large, small, international and domestic stocks — and bonds, if it fits into your plan — means that when one part of your portfolio drops, other parts will weather the storm. If you're looking for a safe hedge against inflation, consider Series I Savings Bonds ("I bonds" for short).
And if you are going to invest in high-risk assets like crypto, financial advisors tend to recommend that you make sure it's something you're going to hold onto for a longer period of time.