Risky market pockets—including cryptocurrencies that are fresh off a massive crash—skyrocketed Wednesday morning as the broader market bounced back from the recent inflation-spurred rout, but analysts and other market experts are warning of a “major correction” on the horizon, one that some believe could happen as soon as the Federal Reserve indicates it will ease its pandemic-era relief policy.
Though major market indexes were ticking up less than 0.5% Wednesday morning, shares of GameStop and AMC surged 13% and 8%, respectively, adding to massive Tuesday gains as at-home investors once again plow into the heavily shorted stocks that fueled unprecedented volatility at the start of this year.
In another sign of the high-risk market’s potential consequences, short-sellers betting against GameStop and AMC lost an estimated $618 million during Tuesday trading hours, according to data from financial analytics platform Ortex, a number that jumped to more than $750 million during after-hours trading.
Other meme stocks that crashed hard in January are also outperforming the market Wednesday: BlackBerry, Naked Brand and Koss Corp. are up 8%, 3% and 2%, respectively.
Meanwhile, cryptocurrencies that tumbled as much as 50% this month are rebounding, with bitcoin, ether and Cardano’s ada climbing 4%, 6% and 12% over the past 24 hours.
In a Wednesday interview with Bloomberg, billionaire hedge fund manager Carl Icahn called today’s bullish markets “dangerous” and said he expects inflation will eventually trigger higher interest rates and a major correction in the market, though the timing and severity of such a crash will be “impossible” to predict.
Meme stocks AMC and GameStop are at their highest levels since late-January, when their rapid rise sparked uncertainty in the broader market that led to the Dow Jones Industrial Average’s worst performance in three months.
“History has shown that bubbles only burst once central banks start to hike rates or take other steps to rein in their ‘easy money’ policies,” Stefan Hofrichter, the head of global economics and strategy at Allianz Global Investors, said in a Wednesday note. “There is a reasonable chance U.S. equities will continue bubbling up further” until the Fed lowers interest rates or stops buying back $120 billion in bonds each month to prop up the economic recovery.
Experts agree that the Fed’s relief pushed stocks and other assets—including resurgent cryptocurrencies—to meteoric highs during the pandemic by injecting an unprecedented amount of cash into the economy, but many expect the Fed to indicate it will start tapering, or gradually reducing, its efforts at the next Federal Open Market Committee on June 16. Though they’ve hit new highs as recently as this month, major stock market indexes are virtually flat from nearly two months ago amid significant bouts of volatility. Vital Knowledge Media Founder Adam Crisafulli said Wednesday morning that stocks have recovered from an early May plunge because investors expect upcoming economic measures will be softer than the very hot inflation reading for April, but he cautions against any “knee-jerk” reaction to news before the Fed’s next meeting. “Should growth stocks [like Amazon, Tesla and other buzzy tech names] take an actual turn for the worse, the whole market would be vulnerable.” Because of their ultra-high valuations, tech stocks are among assets most sensitive to rising rates.
Moody’s Chief Economist Mark Zandi suggested in a weekend note that fears inflation will trigger a recession are overblown because the Fed won’t likely need to hastily raise rates. Zandi expects inflationary pressures to ease later this year once the economy returns to normal and businesses—especially those in the travel and leisure industry—get past the point where they are reversing their pandemic-era price cuts. In a Monday note to clients, Goldman Sachs analysts reiterated a similar point, saying the factors causing rising inflation—soaring used-car prices, production delays in the auto industry and changes in health insurance payouts—are only temporary.