Finally Time To Switch Away From Stocks?

I know that talk is cheap and for the last few months I have babbled on about inflated stock prices and the relative values to be had in cryptocurrencies, so it is ok if you roll your eyes and sigh.  But the relative value case has an inevitability to it that is can’t be ignored. In fact we could be at the tipping point.

This mornings major headline in MarketWatch was: “Dow skids nearly 400 points, S&P on track for longest losing streak in roughly 2 years”  Under the headline:

U.S. stocks slumped Wednesday, with major indexes breaking under key support levels and extending their downward spiral, as rising bond yields continued to weigh on market sentiment.”

Stock investors are increasingly nervous. The CBOE Volatility Index (VIX) was up more than 40% on Wednesday to reach it highest level in six months. About the only time this year the VIX has been higher is back in March when it hit 21. That was about the time the S&P 500 took a 10% dive.  

Oh It’s Just Another October

Market historians will be quick to point out how this is the pattern of nervousness that is typical of October.  So nothing to worry about. Well maybe so but here are some things to consider. There is more than fear in this market. There are some fundamental reasons to be concerned, like technology.

The tech heavy NASDAQ 100 peaked out around the 7,700 less than two weeks ago. Since then it has lost almost 7%.  How important is this: very important. Technology is both the driving force behind the US economy and the stock market as well.  Social media, once the darling of Wall Street, has lost some of its shine. Facebook is down nearly 13%, Google by over 8%. As for Netflix, one of this year’s big winners, this baby has fallen over 13%.

Little wonder then that the VIX has spiked.  We all know that the end of the longest bull market in the history of the universe had to take place some day.  But is now the end?

Interest Rates Are Raising

On Wednesday, the yield on the U.S. 10-year Treasury note TMUBMUSD10Y, +0.47% rose 2.2 basis points to 3.23%, hovering near its highest level since 2011.  This is a key barometer to watch over the next few weeks. There is nothing that can stop a stock market quicker than rising interest rates.

Rising interest rates, per se, is not a new headline.  A little more than a year ago the 10-year T note was yielding less than 2.4% and still the market managed to move higher until now. That is a fact but remember, interest rates for over 5 years were below the rate of inflation. They also remained below where economists call inflationary expectations.

The latest numbers on the Producer Price Index (PPI) and the Consumer Price Index (CPI) continue to show annualized inflation around 2.4% (before compounding).  But now for the first time the cost of money is higher.

The battle between interest rates is something that stock investors will face over and over and this could constrain equity returns going forward.  Remember, since 1982 the world has been through a historic deflationary cycle. During that time interest rates from the high teens to zero. The era of free money is over.

Prime Time For Crypto

While the overpriced US stock and bond markets do their dance with volatility, gyrating nearly 10% within the last two weeks, cyryptomarkets have displayed almost cerebral calm.  Over the last two weeks, Bitcoin was practically unchanged in price and up about 3.5% in the last 30 days (all this before the recent price collapse). Others had fared better between mid September and Wednesday: Bitcoin Cash +6.2%, Ether +16.8%, Ripple’s XRP +64%, EOS +17.4%.  

The list goes on and on, but here is the point.  At long last there appears to be mounting evidence that investors, uncomfortable with conventional technology stocks are finding real value in the deeply depressed crypto market.

Featured image courtesy of Shutterstock .

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.