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A bear market has settled in for tech stocks as the Fed turns hawkish. It doesn’t bode well for
Bitcoin
and other cryptocurrencies.
The
Nasdaq Composite Index
has now slumped more than 20% from its peak last November, putting the tech-heavy benchmark in a bear market. That understates the carnage in tech, however, as many prominent stocks have lost more than half their market value, including
Meta Platforms
(ticker:
META
),
Netflix
(NFLX),
Nvidia
(NVDA), and
PayPal
(PYPL).
Tech is suffering under a barrage of negative pressure: high valuations, slowing growth, and rising interest rates. There also are deepening concerns the Federal Reserve will tip the economy into a recession by tightening monetary policy, removing much of the stimulus it deployed during the pandemic.
Not only is the Fed raising interest rates, it is also seeking to slow the economy by shrinking its balance sheet, a process known as quantitative tightening. That is removing excess liquidity from financial markets, and it is likely to increase borrowing costs by pushing up bond yields—raising the cost of debt financing.
All of it is aimed at taming inflation, of course, while allowing the economy to continue to grow. But that kind of “soft landing” is looking less likely, according to many economists.
“The Fed is much further behind the inflation curve now than it was during the past three soft landings,” said economist Ed Yardeni of Yardeni Research, in a recent note. “Furthermore, nine recessions have followed tightening cycles since 1960. So we wish the Fed lots of luck!”
While the Fed has engineered soft landings a few times—in 1965, 1984, and 1994—this time may be tougher, according to Chris Senyek, chief investment strategist at Wolfe Research. “Our sense is that persistently high inflation and the lagged behind impacts of Fed tightening are likely to spark a recession—perhaps as early as the fourth quarter!” he wrote in a commentary on Monday, advising clients to “stay defensive.”
Those macro headwinds could make it much tougher for Bitcoin and other cryptos to revive from their own bear market. Bitcoin, at around $39,000, is down 16% this year. It remains down more than 40% from its peak last November near $69,000.
Ether,
the native token of the Ethereum network, is down 42%. Smaller cryptos are faring worse, with
Solana
and Avalanche, two of the largest “alt coins,” both off more than 50% from peak prices.
Bitcoin and the
S&P 500
are closely correlated to global money supply, according to Stifel chief equity strategist Barry Bannister. Indeed, a chart of global M2 money supply since 2014 overlaid against both the
S&P 500
and Bitcoin shows them to be in sync—with stocks and Bitcoin rising and falling in tandem as the money supply expands and contracts.
Bitcoin is even more sensitive to changes in money supply than stocks, according to Bannister. A more hawkish Fed and strengthening dollar will both exert downward pressure on the money supply, he notes.
“As Fed…
Read More: Bitcoin and Other Cryptos Are in a Bear Market. The Fed Won’t Help.