Will Stocks Or Crypto Do Better Over The Next Year?Jun 22, 2022
Turns out crypto was not a hedge for inflation, but rather just a hedge to get rich. Jokes aside, crypto has proven to be much more correlated to the market than previously thought.
The reason it is, is largely due to the fact that it's a risk-on asset. What that means is that crypto correlates with other risky assets.
And in a time of volatility, traditional investors have moved their assets from risky investments to less risky ones. We see that first hand with equities. Tech, consumer discretionary, and other "risk-on" sectors have gotten crushed while energy, utilities, and other "risk-off" assets have outperformed.
So why are we telling you this? Because we believe crypto won't recover, barring any major technological or adoption breakthrough, until equities do. And while crypto will likely outperform once equities rebound, the broad-based equity sectors will likely remain depressed until inflation gets under control. The reason inflation is linked to a stock market recovery is mostly due to the federal reserve.
When inflation is high, the Fed increases interest rates. By increasing interest rates, they slow down economic activity. Higher rates equal higher mortgage rates and other debt related-instruments. This encourages companies and people to stop spending as much and save more as savings-based investments increase in value. And by doing this, the thought is that they will slow down demand intentionally.
By slowing down demand, inflation than can finally calm down.
This happens because prices are usually reflective of supply and demand. When demand outweighs supply, prices go up, and when supply outweighs demand prices go down. Think of it like this, imagine you go to a market and want to buy some fruit from a farm.
But when you get to the market there are 10 apples left and 100 people wanting to buy them. Well, what does the farmer do? He raises the price of that fruit because demand is so high.
Eventually, the prices get so out of control, that people find alternatives to fruit and start buying vegetables. Then the farmer lowers prices in order to stimulate demand. And this keeps going in circles until there's equilibrium in the markets.
How This Relates To Current Markets:
But what's happening in the market isn't so different from this silly example. Demand is so high for some goods while supply is unusually stunted. However, what's unique now is that supply is stunted like never before.
This is because of wars in Europe, shutdowns in China and other supply chain issues.
So remember that example before with the farmer and the apples? Well right now maybe there are 100 buyers but instead of 10 apples, there's only 1. That's where the problem lies. These supply chain issues have handicapped supply so hard, that even bringing down demand hasn't fixed the trick like it's done in the past.
In order to fix the supply & demand imbalance, the Fed will need to raise rates so significantly that it slows down economic activity to the point where they can finally get back in tandem.
And stocks aren't doing well because higher rates mean less economic activity. While this can cause a recession it is highly necessary as goods have gotten so expensive that people are having a hard time living. And out of the 15 market crashes that have occurred since 1950, 11 of them didn't reverse until the Fed changed its interest rate policy.
When Stocks Will Recover:
Therefore stocks likely won't do well until the Fed stops raising rates. And the Fed won't stop raising rates until inflation gets under control. And inflation will likely not get under control until either demand craters or supply finally picks back up -- which happens first is impossible to tell, but one will need to happen.
So if you've made it this far and are wondering what this has to do with stocks & crypto well the answer can now finally be explained. Stocks & crypto both won't do well until these things get under control.
And from what we've seen so far, crypto will start to rebound once stocks do. And stocks are likely to make the first rebound. But once that rebound occurs, crypto will likely rebound harder as its risk factor relative to the market amplifies its returns on the way up and the way down.
So long story short, stocks will rebound first then crypto. But crypto will rebound harder and faster once this rebound happens.
So when will it happen? It'll likely occur once inflation shows a sign of cracking. Once there is some light at the end of the tunnel, we're expecting a strong stock market rally on the news!.