Bitcoin Proves That 2023 Stock-Market Rally Is Speculative Froth

Do you think the early 2023 stock-market rally will be based on a solid foundation in terms of fundamentals? It's hard to ignore bitcoin's gains, as analysts at Richard Bernstein Advisors argued in a note published on Monday.

‍

Several critics have claimed that the rally in speculative issues year-to-date may be an indication of a fundamental shift from value to growth in the markets. Bitcoin and other cryptocurrencies have seen a near 50% rally year-to-date, leading us to strongly doubt that this is really the case, according to their report.

‍

There was a slight decline in the S&P 500 index SPX, 0.15% on Tuesday morning, on track to book a loss of more than 2% for February. For the year to date, it has gained 3.7%, while the Dow Jones Industrial Average DJIA, -0.37% has fallen 1.2%. The Nasdaq Composite COMP, 0.34%, the tech- and growth-heavy index, has fallen 0.9% in February, but for the year to date, it has gained 9.7%.

‍

During the 2022 stock market rout, the biggest culprits were growth stocks, or shares of companies whose revenue and earnings are expected to grow faster than their peers, but whose valuations are often based on forecasts of future earnings for many decades into the future. In the case of Treasury bonds yields that are higher, that means that the present value of those future earnings is going to be heavily discounted, which can be especially painful for shares of companies that are not yet profitable.

‍

Analysts in the note dismissed the idea that investors are bidding up growth stocks for fundamental reasons and cited the crypto rally as an example of what they believe will be a short-lived bout of speculation. There has been a considerable rise in the price of Bitcoin BTCUSD, +0.57% over the course of the year thus far, despite U.S. regulators cracking down on the crypto industry in the wake of several high-profile meltdowns and scandals, including the collapse of Sam Bankman-Fried's FTX crypto exchange.

‍

“As a bellwether of speculation, cryptocurrencies seem to be a logical choice. The performance of cryptocurrencies is not based on anything fundamental,” as they wrote in their article. “Cryptocurrencies appreciate solely due to the notion that other speculators will be able to buy them in the future at a higher price in the future.”

‍

It seems that rather than economic or profit fundamentals driving performance, the crypto rally, which has coincided with a revival of interest in so-called meme stocks and profitless companies, could be indicative of speculation rather than real fundamentals driving performance, according to the analysts.

‍

As a result, the Federal Reserve and other major central banks have been withdrawing liquidity at a rate surpassing the withdrawals around the time the dot-com bubble burst in 2000 or the housing collapse in 2008, they stated, arguing that the surge of liquidity in the pandemic-era fueled the run-up of high-fliers in large part.

‍

In response to the analysts' findings, they comment that the move back toward former winners was likely a consequence of investors clinging to the old leadership in the hope that it will return to form. However, when a new bull market appears, the leadership shifts to stocks that are more suitable for the new climate. "The speculative rally so far this year seems to be a perfect example of investors' denial of the changing economic environment in which they live," they wrote.

‍