The equities market is yet again just inches away from its all-time high. Yesterday, the ATH from February was briefly broken only for the S&P 500 to retrace a bit, currently sitting at 3,382. Another small leg higher today, and it will breach the new ATH at 3,387.89.
It only took 175 days for the index to go from peak to bottom to the peak again. However, only a handful of companies are pushing the overall index higher; energy companies are nursing losses of more than 20%.
Thanks to the Federal Reserve stimulus and frenetic buying by buyers, it took less than six months for the S&P 500 to fully recover, unlike the previous 12 cycles when the stocks took an average of four years to recover from the drop of at least 20%.
“It’s really a policy-driven market at this point,” said Jon Adams, senior investment strategist at BMO Global Asset Management.
Loss of Appetite for Assets not offering Income
Despite the ongoing policies, much like stocks, US Treasury yields rose, going to a five-week high as new debt issuance this week drives prices lower and yields higher. Analyst Mati Greenspan wrote in his daily newsletter Quantum Economics,
“The U.S. junk bond market has been on fire lately, setting a new record for the month of August by generating more than $30 billion in trading volume in only seven business days,”
“The amount of big money chasing small money at high-risk is simply breathtaking.”
The anticipation for the bond yields to head higher is weakening the appetite for assets that don’t offer income.
As seen in gold, the precious metal had its worst plunge since 2013 to as low as $1,866. Although it rebounded sharply from yesterday’s fall, it is still trading at $1,932, down 7.3% from its ATH.
Inflation is coming, Much quicker than anticipated
Government policies are also not good in the long term. Already, US consumer prices are rising; in July, they soared more than expected, especially in auto and apparel costs.
Inflation remained muted as the coronavirus suppressed demand, but the Consumer price index rose 0.6% from the previous month following a 0.6% gain in June.
On an annual basis, core inflation is at a four-month high of 1.6%, after measuring 1.2% in June.
Gasoline prices rose 5.6%, clothing 1.1%, used cars 2.3%, new vehicles 0.8%, and car insurance 9.3%, but the cost of grocery falling 1.1% from last month provided consumers some relief.
This increase in consumer prices reflects a rebound in demand for goods and services. The Fed meanwhile doesn’t see a threat of inflation and expects to hold interest rates near zero for the foreseeable future. Brett Ryan, senior U.S. economist at Deutsche Bank Securities Inc., said,
“That’s not a sustained increase in inflation,”
“The bigger picture here is that you’re going to have a persistent output gap and elevated unemployment, and that’s going to put downward pressure on wages.”
Bitcoin Recognized as a Reserve Asset
In these times, people are turning to bitcoin as an inflation hedge.
For now, bitcoin is stuck around $11,500, in red, but up over 200% since March low. In 2020, so far, BTC has recorded 56% returns while still being down 42.5% from its ATH of $20,000.
However, in this cycle, bitcoin is expected to be seen as a reserve by the “most open-minded sovereign state,” said on-chain analyst Willy Woo. As we saw with MicroStrategy and Paul Tudor Jones, it has already started to take shape. He said,
“The thing with BTC is it trades as a risk-on asset, getting bigger shakes this, maybe $1T marketcap that’s 5x from here. $50k-60k BTC will be a mark in the sand.”
In the broad crypto market, altcoins record even harder losses. However, a few coins are still making good gains such as Chainlink (8.62%), TomoChain (10.43%), Algorand (20.39%), WazirX (23%), Aragon network (34%), Waves (36%), HOT (64%), and Numeraire (159%).