Signs of market maturity are emerging as stock prices increasingly correlate with economic data. The distortion of the COVID bubble, characterised by the “bad is good” trading mindset, could be nearing its end.
A Recent Shift in Market Reaction
A recent indication of this shift was the market’s reaction to the JOLTS report, which disclosed fewer job openings than anticipated. In the past year, such news would typically trigger rallies in both bonds and stocks due to the belief that a weakening job market would deter the Fed from raising interest rates. This, in turn, could ease pressure on assets linked to long-duration bonds, such as high-value tech companies and speculative cryptocurrencies.
This pattern partially repeated itself, with the 10-year yield dipping below 3.5% and the dollar returning to year-to-date lows. However, stocks, including the Nasdaq, declined. Instances like this are becoming more frequent as market participants recognise that a significant economic slowdown will also reduce corporate earnings, counterbalancing any valuation recovery stemming from fewer rate hikes.
Gold Rallies While Bitcoin Struggles
Gold was the sole asset to rally alongside Treasuries, reaching a three-year high and nearing a breakout. Its chart mirrored that of bonds intraday. Conversely, as the Nasdaq retreated, bitcoin continued to flounder below $30,000. The leading cryptocurrency’s 30-day correlation with tech stocks is currently at 0.9.
With its value plummeting last year just as inflation spiked – the very factor on which its proponents based their arguments – bitcoin now treads on thin ice. Investors worldwide appear to be gravitating toward gold as a reliable safety trade in uncertain times. While gold may not fare well if Treasury yields rise once more, it is currently living up to its reputation at a three-year high.
Gold’s Potential Breakout Exposes Bitcoin’s Vulnerability
As the market evolves beyond COVID-related frenzy, gold’s potential breakout to three-year highs could expose bitcoin’s vulnerability. If the cryptocurrency continues to perform like a low-grade tech stock amid high inflation, struggling banks, and a cornered Fed, even the most diehard HODLer will have to confront the magnitude of the deception they’ve fallen for.