How Does the Bitcoin Rally Compare to Crude, Stocks and Lean Hogs?
2019 is shaping up to be the year of the ‘everything rally,’ something The Wall Street Journal pointed out in a Sunday article that analyzed the performance of financial assets through the first four months of the year. With nearly 90% of financial asset classes registering positive returns through April, some investors are starting to worry that the rebound is a tad overdone. While this may be true for stocks, commodities and even bond prices, bitcoin’s performance hasn’t been out of the ordinary.
Everything is Up in 2019
As WSJ pointed out, only 11% of 70 asset classes have posted negative returns this year. This means 89% of asset classes are up in 2019. At the current rate, 2019 is shaping up to be the best year for financial assets since the 1920s.
Stocks, bonds, commodities, credit markets and cryptocurrencies have all reported gains this year. While their growth can be attributed to a multitude of factors, they do share one common thread: these assets took a beating at the end of 2018.
The U.S. stock market experienced its worst correction since the financial crisis, with the S&P 500 and Nasdaq briefly entering bear-market territory just before Christmas.
After a stellar third quarter, oil prices resumed their selloff in early October, culminating in a 44% collapse through December.
And while the feared bond bear market of 2018 never really materialized, it was still a rocky year for U.S. Treasuries. Case in point: the benchmark 10-year U.S. Treasury yield surged 0.39 percentage point in the first month of the year and eventually cracked 3% in April. Since peaking in October, bond yields have declined sharply. Yields fall as bond prices rise.
With respect to oil, the Organization of Petroleum Exporting Countries (OPEC) and its allies have managed to cooperate just enough to engineer a sizable price recovery through 2019. The cartel and Russia are complying with a new output deal struck in December, although Saudi Arabia’s plans to make up for lost Iranian crude could disrupt this delicate balance.
And the Winner is…
When measuring total returns, bitcoin and the broader cryptocurrency market have vastly outperformed the other major asset classes. Unlike stocks, commodities and credit markets, bitcoin’s resurgence isn’t out of the ordinary. (Between November 2015 and December 2017, the largest and most influential cryptocurrency appreciated more than 5,600%.)
Year-to-date, bitcoin has returned more than 56% and is on track to double from its December low. Its share of the total cryptocurrency market has swelled to nearly 56%, the highest since September.
By comparison, the overall cryptocurrency market has gained 46% in 2019 and has recovered 83% from its record low.
In terms of the other major asset classes, oil has recovered more than a third of its value, the S&P 500 Index is up nearly 18% and global government bonds are up 1.75%. Even lean hogs have risen more than 11% and copper prices are up 7.5%.
Can the Rally Continue?
From a purely historical perspective, there’s no reason to believe bitcoin can’t extend its rally beyond current levels. Technically speaking, bitcoin achieved the so-called “golden cross” in March, setting the stage for a new dominant uptrend. Growing institutional interest, advances in Lightning Network and the return of retail traders suggest the current four-year cycle will be a virtuous one for the leading digital currency.
Of course, the bull market won’t be without obstacles and big shakeouts, which are discussed in greater detail here.
The outlook on the other asset classes varies significantly. Stocks have fully reversed their fourth-quarter lows and appear to be on track for higher highs in the short term, especially if the United States and China reach a new trade agreement in the next month. Long-term, overvaluation risks remain a significant source of worry for investors. In fact, overvaluation risks have been present ever since the S&P 500 Index crossed 2,800.
Oil prices are subject to actual and perceived supply-demand balances. OPEC may have achieved record compliance in curbing crude supplies, but it faces the same output trap that has dogged the market for the past five years – namely, higher prices lead to more crude production from cost-effective U.S. shale companies. Another violent swing in the price of crude isn’t out of the question.
U.S. government bonds have stabilized now that the U.S. economy appears to be back on track. Bond markets offered some ominous warning signs about the economy back in March when the yield curve inverted for the first time in more than a decade. The outlook on the bond market is directly tied to investors’ perceptions about the economy.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.