When pilots or mountaineers ascend too high too fast, they risk altitude hypoxia. With the supply of oxygen to the brain limited, blood pressure can drop. In extreme cases, fatal cerebral or pulmonary edemas can result. To avoid this terrifying condition, ascend slowly. Once patients are hypoxic, the imperative is to descend, quickly. Markets are suddenly looking hypoxic, with a drastic selloff Friday on Wall Street followed by more dizzying losses to open Asian trading for this week. Forthcoming IPOs, led by Elon Musk’s SpaceX, threaten to intensify the condition as the market struggles to absorb a welter of shares in the rarefied atmosphere. This does look like a case of altitude sickness. The Nasdaq 100 has been further above its 50-day moving average, a measure of the short-term trend, than at any time since 2002. This “overbought” state contributed to the brutal selloff: Extreme valuations foster such conditions. Judged as a multiple of their sales, the recent sharp increase in semiconductors’ profit forecasts has taken the SOX index to an infeasible extreme. The level of the valuation and the speed with which it was reached look hypoxic: Momentum strategies — buying what has been winning — suffered their worst day since Liberation Day. This was primarily about cutting back on the stocks that had gained most altitude: Good news announced Friday provided the catalyst for the excitement. US non-farm payrolls grew by 170,000 in May, the third month in succession of significant gains despite the ongoing war in Iran. Unemployment spent 2024 and 2025 teetering on the brink of recession, and the Sahm Rule (named for Bloomberg Opinion colleague, economist Claudia Sahm) briefly showed that unemployment was rising fast enough to trigger a recession. That’s no longer an imminent risk:  This implies that the Federal Reserve no longer has any need to cut rates for the sake of the jobs market. Traders in overnight index swaps reacted accordingly. This chart is derived from Bloomberg’s World Interest Rate Probabilities function. It shows the projected course of fed funds at the beginning of the year, and on Feb. 27, the eve of the war, compared to projections immediately before and after the unemployment data. The war, and the inflation risks in its wake, had already convinced markets that the Fed would not be cutting more — even under new Chair Kevin Warsh. That’s now hardened into confidence that rate hikes are coming: In some ways, this is an overreaction. Nothing about the employment report suggests any need to raise rates. This was a point President Donald Trump made as he applied pressure on Warsh not to hike — and Warsh can now be seen to help him merely by leaving rates on hold. Next week’s inflation numbers, should they show another sharp increase, might make it far harder for Warsh to resist hikes. That’s in the future. On Friday, the shift in Fed expectations was more than enough to bring a sharp correction for a market already suffering from altitude sickness. The upward trend remains in place, and if there’s any imminent catalyst to break it, it comes from the forthcoming IPOs. Elon Musk, the Contradictions of Indexing and IPOxia |
The IPO of Elon Musk’s rockets-to-Twitter-to-Grok conglomerate Space Exploration Technologies Corp. is almost upon us, and it’s a huge deal. There’s not much to add to the debate over one of the most consequential and controversial market flotations of all time, but it does seem to have performed a valuable service of shining a light on the internal contradictions of passive investing. It’s hard to be meaningfully passive when you’re more than half the market (as Rob Arnott of Research Affiliates pointed out): As of last week, there is now a $1 trillion exchange-traded fund, and as Apollo Group’s Torsten Slok shows, there are now more ETFs than stocks: Passive funds are obliged to buy all stocks in the index they track — but not any others. As they account for more than half the market, that means a lot depends on whether index providers decide to include a new stock. Some retail investors might be very disappointed if they discover their passive fund didn’t automatically give them exposure to a company worth more than $1 trillion. Others, particularly given Elon Musk’s growing ability to divide opinion into fanatics and haters, might be distressed to find they’d bought more. So how do index providers deal with it? Nasdaq decided it would relax its prior rules requiring an IPO to wait until the annual December reconstitution before it could be included in the Nasdaq 100. There will now be quarterly reconstitutions, with a fast-track for companies whose total market cap (not their float) would put them in the top 40 of the index, to enter after seven trading days. That should mean that SpaceX will be in the Nasdaq 100, tracked by the QQQ ETF, by the end of June. It also means a huge extra source of demand for their shares, at whatever price they’ve reached. But S&P DowJones Indices on Friday announced that it will keep its existing IPO rules, requiring them to trade for a year before they can join the S&P 500. OpenAI and Anthropic won’t be in the S&P until late 2027. SpaceX might wait longer, because S&P also requires new members to be making a profit, which it has yet to do. S&P did relax rules to allow swift entry to its total market indexes. So “passive” managers are giving their clients an active choice: the Nasdaq 100 or a total-market index if you want to dive straight in to this year’s IPOs, and the S&P 500 if you’d rather wait until they’re established as public companies. S&P’s decision is the crucial one. The S&P 500 is the most widely followed index, tracked by both of the two largest ETFs. It has long had a culture of trying to produce indexes that people will want to track, rather than measures of more academic interest. The S&P 600 small-cap index, a rival to the better-known Russell 2000, illustrates the difference. The Russell is based strictly on market cap. S&P imposes requirements that companies have turned a profit before they’re included. Both contain useful information. But S&P’s is the superior investment, because it performs slightly better. Over years, that difference compounds: S&P should be thanked for its decision, which ought to mute some of the potential excesses of demand. For the longer term, though, there will still be plenty of involuntary demand for SpaceX. The passive industry must deal with the fact that its investors have just learned that their investments cannot be truly passive. Bitcoin is not in a happy place. Amid Friday’s fallout, it fell below $60,000, more than 50% down from its 2025 record high. It’s back where it was five years ago, when institutional adoption was almost non-existent, and the current pro-crypto regulatory framework was absent. Losses among other digital assets are more pronounced: Ethereum is down about 65% from its high last August. Aggregate crypto market cap, which peaked at $4.38 trillion in October, has plunged by about $2 trillion: In the near term, Bitcoin’s loss of its safe-haven appeal suggests that peace in Iran (looking increasingly unlikely after 100 days of war) would help. It’s not the only putative refuge to suffer a major reverse during the conflict, with silver and gold giving up their gains from earlier in the year: The question now is where crypto might find a floor. A prolonged selloff would breathe new life into skeptics’ view that Bitcoin’s intrinsic value (if it has one) is far closer to zero than proponents admit. But there are limits. Despite selling his Bitcoin, billionaire investor Mark Cuban argues that fears it could hit zero may be exaggerated: I’m not saying it goes to zero. I’m saying its whole value is built on supply and demand, with a little premium for payments.
Even if calamity is ruled out, protracted lackluster performance is possible. BCA Research’s Felix Vezina-Poirier points to widening divergence from the equity market: AI stocks have offered crypto-like returns with a clearer narrative, likely drawing some risk-chasing and momentum flows away from the crypto market.
Bitcoin ETFs have seen more than $4 billion in outflows in the last two weeks, while Michael Saylor’s Strategy’s first Bitcoin sale since 2022 added another symbolic blow. As BCA shows, crypto winters tend to last longer than investors expect: Longview Economics’ Chris Watling points out Bitcoin’s track record as a leading indicator of market liquidity over the past decade. Its highly speculative nature has often made it an early gauge of changing liquidity conditions, with broader risk assets following its lead: If this relationship still holds, Watling offers three potential explanations. Either the correlation between Bitcoin and broader market liquidity has broken down; digital gold is signaling an S&P 500 correction; or the market narrative is correct, and Bitcoin’s weakness reflects Saylor’s shift at Strategy. Watling considers the last possibility unlikely. Stephane Ouellette of FRNT Financial suggests that SpaceX’s IPO is emerging as a destination for former HODLers (Hold On for Dear Life) seeking a speculative thrill. Combine that with crypto investors’ tendency to sell into every perceived rally, and HODLers’ ranks are fast shrinking. | 
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