Markets
As Bitcoin Continues to Fall, S&P 500 Correction Could Happen Soon
Bitcoin’s recent weakness could signal an impending correction in the S&P 500 over the summer, as the two assets often trade in tandem, according to Barry Bannister, managing director and chief equity strategist at Stifel.
Bitcoin has fallen six of the past seven days as of Monday. The largest cryptocurrency by market cap
Bitcoin has fallen more than 23% from its all-time high of $73,798 set in March, while still up 33% year-to-date, according to Dow Jones Market Data. Bitcoin posted a rolling monthly loss of 20.8% last Friday, the worst since the one-month period ending Nov. 28, 2022.
In contrast, the S&P 500 SPX is on track to set a new closing record. The index is also on track to record its fifth consecutive day of gains, its longest streak since Jan. 25, when it advanced for six straight days, according to Dow Jones Market Data.
However, the often strong correlation between bitcoin and stocks in the past could indicate “an impending summer correction in the S&P 500,” Bannister noted.
Since 2020, as the Federal Reserve injected liquidity into the market following the outbreak of the COVID-19 pandemic, cryptocurrencies and stocks have begun to demonstrate a relatively strong correlation, although the correlation wavers from time to time.
While some cryptocurrency market participants have argued that bitcoin’s recent weakness is primarily due to idiosyncratic reasons, particularly repayment plan According to Bannister, the price of bitcoin still primarily reflects macroeconomic situations, according to bankrupt cryptocurrency exchange Mt. Gox.
“It’s the availability of cheap liquidity from the Fed that’s driving the price of bitcoin,” Bannister said in a phone interview. “Every dovish pivot over the last 13 years has been a big rally in bitcoin, and bitcoin is a non-interest-bearing asset that thrives on lower interest rates and available liquidity.”
The largest cryptocurrency is a good gauge of speculative appetite and changes in Fed policies because bitcoin trades 24 hours a day, seven days a week, with high volatility, Bannister said.
While bitcoin has fallen, Bannister is bearish on stocks, expecting the S&P 500 to see a correction soon. A correction typically refers to a market decline of more than 10% but less than 20% from a recent high.
“The market could correct if the Fed doesn’t cut rates this year. We’ve reached the end of the line where the economy is not as strong and persistent inflation would simply be the worst possible outcome,” Bannister said.
While traders in fed funds futures are pricing in two rate cuts by year-end, starting in September, Bannister is pessimistic. Core PCE numbers are expected to be higher than expected in late summer and early fall, making a September rate cut unlikely, Bannister said. The likelihood of a December rate cut could also be low, as inflation could continue to be a problem, Bannister said.
Jonathan Krinsky, chief market technical officer, also highlighted the risks stocks could face, with bitcoin down more than 25% since early June. “Bitcoin has been a good leading indicator for the Nasdaq-100 over the years,” Krinsky wrote in his Sunday note.
Will Rhind, founder and CEO of investment firm GraniteShares, disagrees. Hoping for a rate cut this year, Rhind expects large-cap tech stocks to continue to drive the stock market higher through the end of the year. These stocks have strong fundamentals, while potential rate cuts would likely boost their valuations, Rhind noted.
With tech stocks and bitcoin often trading in tandem, Rhind said he expects bitcoin to show strength through the end of the year, despite its recent weakness.
“We are in a risk-on market. There is no reason to believe bitcoin will behave any differently,” Rhind said.