Up the stairs and down the elevator

The stock market is never dull, and the start to this year has been more entertaining than most. The S&P 500 may have been largely unchanged in the past week and since the start of the year, but that hardly tells the story. The Nasdaq is hovering in correction territory, defined by a 10% fall from a peak. The enterprise software sector is down almost 30% from its peak, so if anyone is looking for a bubble that burst, they may well have found it. Commodities have been on a roller coaster, with one example being the silver market moving 10% in a day, which has become almost the norm. Finding examples of sector volatility is not hard; it seems anything that misses expectations is hit hard. For example, Volvo fell 25% in a single afternoon. Defence stocks have fallen an average of 10% in the past week. We discussed that investors felt greedy at the start of the year; now it seems fear is starting to take hold. The Vix index is up over 25% in the past week. As the saying goes, the stock market climbs stairs and goes down the elevator, but this is the land of opportunity.

We don’t talk much about Bitcoin. You may have read my colleague’s excellent piece on the possible value of cryptocurrency a few months ago. The price has fallen from over $120,000 not long ago to below $65,000 this week, undermining the theory that it is a safe-haven asset in times of uncertainty. Since the middle of last year, when crypto assets peaked, just under 2 trillion dollars in value has been lost. What is of greater concern is the potential for contagion to other assets as margin calls are triggered against leveraged Bitcoin owners. The move in the software sector could have been exacerbated by Bitcoin holders dumping their liquid holdings in other assets to meet these calls. The announcement of the anthropic new learning machine seems to have had a similar impact on certain parts of the technology sector to DeepSeek’s in early 2025.

In other news, the Bank of England kept interest rates unchanged, however by a narrower majority, 5-4, than had been forecast. The Bank made the usual adjustments to its economic forecasts. Inflation expectations are for inflation to return to its 2% target for April this year, as opposed to 2027. Their 2026 growth forecast was cut to 0.9% (from 1.2%). 2027 growth was also slightly downgraded to 1.5% (from 1.6%), and the unemployment rate is expected to rise higher than initially thought, peaking at 5.3% in 2026. The pound sold off as the narrowness of the vote and changes in economic forecasts led the market to believe a rate cut will now happen in March. There was also a modest rally in the gilt market. The ECB, for what it’s worth, also left rates unchanged. The pound lost almost 1% against the dollar and the euro on Thursday.