Wednesday's Market Minute: If Rates Break Out, Bitcoin's Most At Risk

One key reason why stocks have been so strong is because they’re just not that expensive. It’s true. It’s a brutal pill for bears to swallow, but the most important one: the S&P 500, even after a shocking 27% comeback since the October low, is significantly cheaper than it was during the Covid trading bubble. Price/earnings on a trailing and forward basis are 22 and 21, compared with 33 and 31 at the 2021 peak.

Valuations are not a bull-case in their own right, but they offer an extraordinary defense of the equity rally, and sometimes the best offense is a good defense. 

You can’t say the same thing about crypto, a market still worth over $1 trillion. Why? Because there’s a Spot ETF coming? Maybe there is. Is there anyone who wants to trade it who hasn’t already with coins, companies, ETFs, ETNs or futures on crypto? Or would an ETF just be a super-liquid offramp for bulls who’re tired of seeing bitcoin stuck at the same level, or maybe just antsy about what’s going to come up in the government’s investigation of the exchanges?

Right now the economy is better than pretty much everyone thought it would be after the most aggressive hiking cycle in history. Inflation roared last year, central banks sprang into action, and now prices are coming off their peak. We hit a few potholes, our undercarriage bent, but it didn’t break, and the car is still headed in the right direction. Jerome Powell’s Federal Reserve is enjoying a moment of flexibility with which few thought they’d be graced; the exact opposite of what coiners predicted.

Stocks are breaking away from crypto because even though things are going surprisingly well, investors are still wary of making the same mistake twice. Instead of throwing cash at every snazzy new SPAC, IPO, token or startup, they’re going for less speculative assets: quality stocks with good cash flow, big-tech turnaround stories, and truly innovative companies that have the potential to benefit from the computing breakthroughs of artificial intelligence.

Crypto’s incoherent macro case leaves it particularly vulnerable to any risk-off event, and the most likely one at the moment seems to be a potential breakout in Treasury yields higher. If it happens, it will mean more tightening of the economic belt, and bitcoin's relative performance to stocks should worsen.

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