Text size
Bitcoin has seen its longest winning streak in years this month as investors pile back into the most risk-sensitive assets.
Dreamstime
A jubilant start to the year for the most risk-sensitive assets is one of the best signs that investors see light at the end of the tunnel after a brutal 2022.
But as
Bitcoin
and tech stocks keep marching higher, they risk becoming divorced from fundamentals and vulnerable to a nasty surprise.
Bitcoin and the
Nasdaq
are on a winning streak, with the largest cryptocurrency climbing almost 40% so far this year and the tech-heavy stock index up near 10%, beating the
Dow Jones Industrial Average
and the
As the riskiest of the lot, cryptos and tech are at the leading edge of sentiment for risk-sensitive assets. Their recent rally, in turn, bodes well broadly, because it marks a decisively optimistic shift in sentiment after one of the gloomiest stretches in crypto history and the worst year for the stock market since 2008.
Bouncing back from two-year lows, many traders are wagering that Bitcoin’s jump marks the end of a brutal bear market. History says stocks could soon follow, and the move higher in the Nasdaq suggests that trend could be starting.
“On average, Bitcoin has topped ~48 days and bottomed ~10 days before the S&P 500,” analysts led by Kevin Kelly at crypto research firm Delphi Digital outlined in a 2023 preview. “When market conditions change, it’s often the first to react. Over the past five years, all major price reversals in Bitcoin have preceded those in major equity indices.”
It’s true: Bitcoin topped 42 days before the S&P 500 in 2017, bottomed eight days prior to the index in 2018, hit its trough 11 days ahead of the rest of the market in 2020, and marked its November all-time high 55 days before the S&P 500 did so in January 2022.
So what’s driving the rally?
“Markets more broadly are pricing in an easing of monetary policy by the Federal Reserve to happen later this year, and we’ve seen strong evidence of this in the form of surging prices for Bitcoin and a wide variety of other crypto assets,” said Brent Xu, the CEO of decentralized finance (DeFi) bond platform Umee.
Indeed, most of the pain last year came from a dramatic increase in interest rates by the Federal Reserve, which aggressively tightened financial conditions in a bid to get historically high inflation under control. Recent signs in economic data that inflation is cooling, and the economy is slowing enough to warrant a pivot by the Fed, is fueling optimism that this tough era could be soon over.
The risk is that investors are getting ahead of themselves. Officials from the Fed have cautioned in remarks this year that tackling inflation remains a priority and that rates are likely to go higher. You can’t fight the Fed. The central bank will always win. If investors are ahead of themselves, the Fed won’t catch up—investors will fall back.
“The gap between the market and Fed right now is huge,” said Neil Wilson, an analyst at Markets.com. “Garbage is leading the rally…I don’t think that the market is reading this right. The macro is broken.”
Wall Street price targets provide more evidence of this gap. UBS Global Wealth Management has a June price target for the S&P 500 of 3,700 points, rising to 4,000 by December. The index closed at 4,019 on Monday.
“We do not see much scope for markets to rally in the near term, especially given our outlook for continued pressure on corporate profit growth,” said Mark Haefele, the group’s chief investment officer.
Make no mistake: Bitcoin and the Nasdaq suggest there is a rally to chase. Just how much that rally has legs—let alone how painful it could be in a reversal—is another matter.
Write to Jack Denton at jack.denton@barrons.com
