by Krystal Daibes Higgins, CFA
Vice President, Equity Research
While it was a relatively quiet week of macroeconomic news, investors are still busy making sense of the inflation and interest rate paradox: that is, inflation stoking recession fears, but also rising rates to combat inflation also stoking recession fears. In addition, the expected diversification benefits from combining stocks and bonds have failed investors the first half of this year—a very rare occurrence. According to Strategas Research, U.S. stocks are off to their fourth-worst start to the year and the S&P 500 is off to the worst midterm election year start in history. Against this difficult equity environment, nearly all fixed income funds are trading at a year-to-date loss.
For those looking beyond the current market rout, the silver lining is that stocks typically recover after such a terrible start. After sinking 6% last week—the worst since March 2020 when lockdowns began—stocks rebounded to kick off the short week, with the S&P 500 rising 2.5%. At this point in the stock market’s cycle, it appears investors have already largely priced in a recession. Barring other macroeconomic or geopolitical shocks, it’s possible that we have reached or are already near the bottom for this bear market.
Unstable Coins
A series of unfortunate events has once again roiled cryptocurrencies. With Bitcoin down over 70% from its November peak, it is estimated that more than 50% of Bitcoin investors are now in the red. While extreme volatility is expected with cryptocurrencies, a subgroup called stable coins was established to minimize volatility by maintaining collateral in the form of reserves, often U.S. dollars. This subgroup too, however, is proving to be anything but stable, as most are given the label without the actual asset backing. This labeling was evident when one stablecoin called TerraUSD, a stablecoin with a $1 peg that was linked to another cryptocurrency called Luna, dropped 99% of its value in the last two month. In total, $60 billion of investor value was wiped with just one stablecoin. More concerning, another stablecoin called Tether, which is the largest stablecoin issuer and actually backed by reserves, is having difficulty maintaining its peg to the dollar after investors rushed to exchange their Tethers for dollars, forcing the company to pay out more than 10% of its reserves. While the company survived the crisis, another big downturn could spark a domino effect that triggers panic selling and thousands of investors losing even more in their cryptocurrency investments. Finally, a more recent negative event took place when Celsius Network, a U.S. crypto lending platform that offers low-interest loans and high yields to users who deposit their cryptocurrencies, reported that it is freezing all withdrawals, swaps and transfers between accounts. These events have certainly reinforced our long-held skepticism on the viability of cryptocurrencies in an investor’s portfolio.
Takeaways for the Week:
Diversification benefits has failed investors this year as the S&P 500 struggles to climb out of bear market territory as the average return of the fixed income fund is down 8% year-to-date
The cryptocurrency market is also being impacted by higher inflation and rising rates, as it has lost nearly 2/3 of its value so far this year