Stock Market Rebounds While Crypto Disintegrates
This week saw the collapse of FTX, one of the biggest cryptocurrency exchanges in the world, which dominated headlines. The company’s CEO, Sam Bankman-Fried, had wanted to sell it to Binance, another prominent cryptocurrency company, but the agreement fell through this week. In reaction, the price of bitcoin plunged by almost 13% this week. In the foreseeable future, we believe cryptocurrency owners may encounter difficulties.
The News Ahead
This week, a news item from China had a significant impact on market psychology. We have been horrified by China’s extremely stringent Covid policy ever since the pandemic first started. For nearly three years, this has resulted in serious suffering and an economic recession for that nation. Given China’s economic significance, both in terms of supply chains and consumer demand, the country’s draconian Covid regulation has been a hindrance for almost every business that does business there. We learned this week that China is thinking of relaxing its strict pandemic regulations. This suggested policy reform will most immediately help several industries.
The “What’s Not Working” category is dominated by cryptocurrency, with five of the list’s worst-performing ETFs belonging to that industry. Below, we’ll expand on our ideas about cryptocurrency.
The worst performances were typically seen in bond and stock ETFs that bet against the markets, which was to be expected. The only noteworthy ETF to experience a decline this week was the Alerian MLP ETF (AMLP), which focuses on oil and gas pipelines. In comparison to the previous week, it fell by 1.72%.
Changing Inflation Picture
We have had enough opportunities to learn over the past year that inflation is the thief of (market) joy. Inflation raises interest rates, and higher interest rates result in lower stock values, particularly for growth-oriented businesses. We are aware that there have been times in 2022 when it seemed as though inflation had peaked, only for things to revert and readings to spike once more. So, the question that arises is whether prices are temporarily levelling off again or if inflation has indeed peaked.
A number of commodities, including lumber, metals, food ingredients, and now used vehicles, which were one of the leading causes of inflation, have begun to experience anecdotal evidence of declining prices.
As mortgage rates rise beyond 7%, we are beginning to see signs of a reversal in some of the regions where house values increased the fastest. In several of the hottest western cities, property values have dropped by 5–10% over the past three months. Accelerating revenue growth and the corresponding continuous share price increase provide growing companies with the rocket fuel they need to expand. It is a constructive cycle.
This positive cycle came to an abrupt end in 2022, and large-size technology companies were among the worst-performing securities on the market. Businesses of all stripes have sought ways to reduce spending as a result of growing costs, which have notably hurt software industries.
The big tech boom is over, and some significant businesses in the industry are taking steps to rationalise staff through layoffs. This is a sign of the times. The 13% employment reduction announced this week by Meta Platforms (META) is a wonderful illustration of this. From a shareholder’s perspective, we would like to see comparable actions taken at other significant tech companies, whose generosity has significantly reduced profits over the past year.
Where are we at with Crypto?
Over the past ten years, Bitcoin has risen dramatically. We believe that there are primarily two types of investors in the cryptocurrency market: (1) aggressive investors who saw the price of cryptocurrencies rising and wanted to capitalise on the trend; and (2) “mavericks” who wanted to own an asset unrelated to the government, central banks, regulations, or the established monetary system.
The demise of FTX this week demonstrated the inherent risk associated with cryptocurrency investment. For many of the operators in the sector, regulation is merely an afterthought. The “JP Morgan of crypto,” CEO Sam Bankman-Fried (SBF) of FTX, was dubbed informally as one of the industry’s thought leaders. In our industry (asset management), financial restrictions are in place to safeguard the customer, and we like it that way. In the crypto world, it doesn’t appear that such a system exists, hence the only guiding principle is “buyer beware.” Investors in cryptocurrencies: if you haven’t sold your holdings yet, now is the time to do so.
Returning to the aforementioned aggressive investors, many of them would have been knee-deep in the cryptocurrency market. We encourage you to think about a fresh direction for your portfolio. Finding intriguing companies on the public markets entails getting dirty.
Conclusion: Takeaways
Though we are still in the early stages of that development, things do appear to be getting better. As long as inflation and rising interest rates are the main topics of conversation, investors should be realistic and anticipate turbulence in their investment lives.
The Federal Reserve is pondering modifying its hardline monetary policy, and this week brought the first indications that inflation is starting to slow down.
That being said, we must continue to focus at least a few of our investment effort on defensive industries where we do anticipate growth, such as small- and mid-cap companies, healthcare, energy, and the insurance industry.
