Do you think that the stock market rally in early 2023 is built on a solid foundation? Bitcoin’s gains suggest otherwise, analysts at Richard Bernstein Advisors argued in a Monday note.
“Some have argued that the year-to-date rally in more speculative issues is a fundamental shift from value to growth. The nearly 50% year-to-date gain in bitcoin and other cryptocurrencies leads us to strongly doubt that is the case,” they wrote.
The…
Do you think that the stock market rally in early 2023 is built on a solid foundation? Bitcoin’s gains suggest otherwise, analysts at Richard Bernstein Advisors argued in a Monday note.
“Some have argued that the year-to-date rally in more speculative issues is a fundamental shift from value to growth. The nearly 50% year-to-date gain in bitcoin and other cryptocurrencies leads us to strongly doubt that is the case,” they wrote.
The S&P 500 index
SPX
was slightly lower Tuesday morning, on track to post a February loss of more than 2%. It is still up 3.7% year to date, while the Dow Jones Industrial Average
DJIA
has decreased by 1.2 percent. The technology- and growth-heavy Nasdaq Composite
COMP
has put back 0.9% in February, but is still up 9.7% so far this year.
Growth stocks — stocks in companies that are expected to grow revenue and earnings at a faster pace than their peers, but whose valuations are often based on expected earnings far into the future — led the stock market in 2022 as Treasury yields jumped. Higher government yields mean that the present value of these future earnings is more heavily discounted, which can be particularly painful for stocks in companies that are not yet profitable.
In the note, the analysts rejected the idea that there is a fundamental reason for investors to bid up growth stocks and pointed to the crypto rally as a proxy for what they see as likely to be a short-lived bout of speculative activity. Bitcoin
BTCUSD
has rallied more than 40% year-to-date, shrugging off a regulatory crackdown on the crypto industry from US regulators in the wake of a series of high-profile meltdowns and scandals, including the collapse of Sam Bankman-Fried’s FTX crypto exchange.
“Cryptocurrencies act as a clock for speculation. There is absolutely nothing fundamental based on the performance of cryptocurrencies,” they wrote. “Cryptocurrencies appreciate only on the thought that other speculators will buy them in the future at higher prices.”
The crypto rally, which has come alongside revived interest in so-called meme stocks and profitable companies “suggests speculation rather than true economic or profit fundamentals driving performance,” the analysts wrote.
Meanwhile, liquidity is being withdrawn by the Federal Reserve and other major central banks at a pace that surpasses the withdrawal around the 2000 dot-com bubble burst or the housing collapse of 2008, they said, arguing that the run-up of pandemic-era highflyers was largely fueled by the acute increase in liquidity.
The analysts said the move back toward past winners reflected a tendency by investors to “cling to the old leadership in the hope of a return to form.” In reality, when a new bull market occurs, management shifts to stocks that are better suited to the new environment.
“The speculative rally so far this year seems a perfect example of investor denial of a changing economy,” they wrote.
