In today’s Money Morning…stocks look to the silver lining…an impending divergence…the next big crypto boom may be right around the corner…and more…
They finally did it…
The Federal Reserve has actually raised interest rates.
Yes, overnight the big news in markets was Powell and Co’s decision to pull the trigger. US rates are now officially 25bps higher.
No one should be surprised by this move, though.
This rate hike has been priced in for quite some time now. It was simply a question of how large it would be, and the Fed has clearly chosen to tread cautiously. At least for the time being.
What investors should be focused on, though, is the Fed’s plan for the rest of 2022. Because as their dot plot forecasting suggests, we could see six more hikes before the year is out. It’s a move that many market watchers have certainly considered, but now looks all but confirmed.
In other words, the Fed is finally trying to catch up to the runaway inflation it has caused.
But with growth already slowing in the US economy and QE out of the equation, the Fed may be putting itself in an unwinnable situation — an outcome that could lead to far more market carnage than any pandemic or war.
Stocks look to the silver lining
Perhaps the most surprising reaction to the Fed’s decision is the late surge in US stocks.
The S&P 500, Dow Jones, and Nasdaq all finished the trading day strongly. It was the tech-heavy Nasdaq that benefitted the most, though, closing 3.8% higher.
Clearly many investors are treating the Fed’s light touch as a greenlight to dive into risk again. Particularly as we’ve seen the price of oil come back down to reality in recent days.
As for whether this jubilation will last in the long term, it is hard to say.
Six rate hikes will put a lot of pressure on growth stocks and risky assets, especially for investments that rely on large amounts of financing with little profit to show for it. The kind of business model that is often favoured by tech start-ups.
For the time being, the party in equities looks to be continuing.
It will be interesting to see how the coming weeks and months influence this optimism, though. I think the Fed is really hoping that they can tame inflation without bringing the US economy to a standstill. The last thing anyone wants to see is stagflation.
Which brings us to perhaps the most interesting asset to consider in all of this: crypto.
In a rather uneventful trading session, Bitcoin [BTC] has mirrored the response of US stocks. At first the reaction to the Fed’s decision was fairly negative, but this was quickly reversed by a surge in price.
Many would probably argue that any impact of rate rises for bitcoin has long been priced in, going all the way back to the start of the year when the Fed started hinting at such moves.
So with that in mind, bitcoin and crypto as a whole have shrugged this news off easily.
The big question now is, will this sector share the same fate as the high-risk tech stocks (for better or worse) or carve out its own path?
An impending divergence
See, when it comes to bitcoin and crypto, this is the first time it will have to face rising rates as a relatively mainstream asset.
Back in 2017–18, when the Fed was in its last rate rise cycle, bitcoin was still fairly obscure. But despite being a risky asset, the market cap soared from US$15.49 billion to US$237.47 billion in just 12 months.
That was the massive bull run of 2017; back when bitcoin first closed in on US$20,000.
In the years that followed, though, when the Fed started cutting rates again, bitcoin crashed hard. From early 2018 till late 2020, the crypto market entered one of its infamous periods of dormancy.
And then, as I’m sure you know, it exploded to life once more.
That’s why today it is now treated as a somewhat mainstream asset — one that is increasingly being linked to the performance of traditional stock markets.
According to some, logic suggests that as a risky asset (like many equities), bitcoin will increasingly correlate to stock performance. I’m not so sure about that in the long term, though…
Bitcoin and crypto are much more than just speculative assets.
Most investors may not care about that right now, but it is an important distinction. In fact, I’d argue that it is because of the utility of these digital coins and tokens that we’re seeing some big names finally capitulate on the potential of crypto.
Take the ‘King of Bonds’ himself, Bill Gross, for example:
‘I simply think that, you know, the crypto coins are a bubble. I do think there are survivors,
‘I do think we need an alternative to the dollar as we’ve seen in the last week or two and that you know, there will be several survivors and I’m invested to a small extent in
This is a stark reversal from Gross who has long been a critic of bitcoin. And while he certainly hasn’t been as vocal as other famous Wall Street icons, his change of attitude is in line with others.
More and more, we’re seeing these high-profile investors start to see the potential of crypto.
It is for that very reason that I think we’ll see bitcoin potentially head down a different path to stocks, at least during this current Fed rate cycle.
But don’t take my word for it. You should listen to our in-house crypto expert Ryan Dinse.
He explains that while bitcoin is and will likely continue to dominate the crypto narrative, it isn’t the only option to consider. In a series of in-depth videos, Ryan explains why now is the perfect time to explore the full potential of the crypto market.
Check out the first discussion for free right here.
Because no matter what the Fed does or doesn’t do, they can’t stop what’s coming.
The next big crypto boom may be right around the corner…
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.