On September 20th, the US Federal Reserve issued the following message that resonated in financial markets: Interest rates are expected to remain at their highest levels in more than 20 years, perhaps for longer than most market participants expect. This stance comes against a backdrop of high inflation, with core inflation running at 4.2%, well above the central bank’s 2% target, and record-low unemployment.
As investors face this new reality, pressing questions arise. Will the S&P 500 and Bitcoin (BTC) continue to underperform in the face of tight monetary policy?
The impact of the Fed’s decision was swift and severe. The S&P 500 fell to its lowest level in 110 days, suggesting growing anxiety among investors.
Notably, the 10-year US Treasury yield has risen to its highest level since October 2007. The move reflects the market’s view that interest rates will continue to rise, or at least that inflation will eventually catch up with the current yield of 4.55%. In both cases, there are growing concerns about whether the Fed can sustain these rate increases without destabilizing the economy.
Bitcoin does not necessarily follow traditional markets
One interesting development during this financial turmoil is the apparent disconnect between the S&P 500 and cryptocurrencies, particularly Bitcoin. Over the past five months, there has been no clear trend in the 30-day correlation between the two assets.
Such a divergence suggests that Bitcoin was anticipating a stock market correction or that external factors are at play. One plausible explanation for this decoupling is the hype surrounding the possible introduction of a spot Bitcoin exchange-traded fund and regulatory concerns that are hampering the cryptocurrency’s potential upside. Meanwhile, while the S&P 500 has benefited from a strong second quarter earnings report, it’s important to remember that these numbers reflect three months ago.
Financial conditions are moving into uncharted territory as the Fed stands by its commitment to high interest rates. Some may interpret the central bank’s stance as necessary to counter inflationary pressures, especially if existing loans are coming due and must be refinanced at significantly higher rates. Some worry that keeping it high could put a strain on households and businesses.
Decoupling could benefit Bitcoin price
Several factors could cause cryptocurrencies to become decoupled from traditional markets such as the S&P 500. Concerns may arise if the government faces difficulties in issuing long-term debt. The inability to issue long-term debt may signal fiscal instability, motivating investors to seek hedges against a potential economic downturn. In such cases, alternative assets such as gold or Bitcoin may be attractive options.
Related: Will Bitcoin Price Stay at $26,000 Ahead of $3 Billion Monthly BTC Option Expiration?
Even if the dollar is strong, inflation could force the U.S. Treasury to raise the debt ceiling, which could lead to a decline in the currency’s value over time. This risk remains important as investors seek to protect their wealth with assets that are less susceptible to inflation.
In addition, housing market conditions also play a vital role. If the housing market continues to deteriorate, it could have a negative impact on the broader economy and the S&P 500. The interconnectedness of the housing market and banking sector and the potential for deterioration in consumer credit could lead to a flight to assets with scarcity or hedging capabilities.
There is also the potential for political instability globally and even during the 2024 US election period. This creates uncertainty and may affect financial markets. Capital controls are a growing concern in some countries, and historic examples of international economic embargoes highlight the risk that governments could impose such restrictions and drive investors further into cryptocurrencies. There is.
After all, unlike traditional stocks and bonds, cryptocurrencies are not tied to yields that outpace corporate earnings, growth, or inflation. Instead, they march to the beat of their own drum, influenced by factors such as regulatory changes, resilience to attacks, and predictable monetary policy. Therefore, Bitcoin could significantly outperform the S&P 500 without requiring the scenario described above.
This article is for general informational purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, ideas, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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