• The US Dollar index is narrowing on the Dotcom-era bust highs.
  • US and international stock markets are shedding value.
  • Are we on the precipice of another sharp sell-off?

All eyes are on the Fed

Markets are jittery leading up to Wednesday’s critical interest rate decision and monetary policy statement from the US Federal Reserve. Slated for a ¾ % rate hike and fearing language that will drag out the recent slew of hikes, investors have been risk-off in recent days.

The DJIA is down 5% from the start of last week, with most other international indices trailing the losses. The S&P ASX 200 has shed 4% from the close on Monday the 12th.

The global macro uncertainty and rising yield offered on low-risk US treasuries are funnelling money to the relative safe harbour of the US Dollar, sending the US Dollar index (DXY) to the highs of the Dotcom-era bust, currently 110.28.

The current state of affairs

 

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Inflation not seen since the oil embargo of the late 70s and early 80s has led the Federal Reserve to raise interest rates sharply over the last six months.

Commodity importing countries have been wilting under the pressure of high raw material prices, driven by a combination of concurrent post-Pandemic reopening and reshuffled energy supply lines in Europe.

The British pound is at its lowest level in over 40 years, currently 1.1376 GBP/USD. The Euro has followed a similar trajectory and is below parity with the US Dollar.

Dotcom-era parallels

To paraphrase, history doesn’t repeat, but it rhymes. Under the new horizon of eCommerce and unchartered customer growth, new businesses grew quickly in the late ‘90s.

In this current cycle, Shopify, Amazon & Alibaba have lowered the barrier to entry for retail, the pandemic opened the door to the markets, and again the number of new businesses has exploded.

Trouble brewing

Data from the US Bureau of Labour Statistics (BLS) suggests that 45% of businesses fail within the first five years. We are now past 24 months from the explosion of new pandemic-era businesses.

Rising costs associated with raw materials, shipping, wages, and now borrowing costs will heap more pressure on businesses already disadvantaged by the heavy hand of chance.

A sharp reduction in the number of new businesses will spell trouble for eCommerce service providers.

  • Shopify Inc NYSE:SHOP (SHOP) is down 6% on Tuesday and 80% from the November 2021 highs
  • Afterpay ASX:SQ2 (SQ2) off 50% from March 2022 highs, trading at $92 AUD per share.
  • Amazon NASDAQ:AMZN (AMZN) is down 33% from November 2021 levels, trading at $122 USD per share.

Days and months ahead

In the Dotcom era, the US S&P 500 hit its highs in March of 2020, trading sideways for a few months before falling 50% over 24 months.

From the November 2021 highs, the S&P has given up nearly 20%. If there are parallels between the Pandemic era and the Dotcom era, we still have some way to go on the downside.