Bitcoin is moving towards $100,000, driving significant increases in the stock prices of some cryptocurrency-related companies. But this has also raised questions about what it might mean for other parts of the stock market.
As the world's largest cryptocurrency approaches another milestone, some observers say its rebound is becoming yet another warning signal of overheating risks in the market.
What is concerning is that investor interest in risk assets (including categories like Bitcoin and stocks) is nearing the bubble levels seen in 2021. Many may remember that this brief period brought huge gains to investors but ultimately laid the groundwork for a punishing bear market the following year, resulting in substantial losses for novice investors.
Just as at that time, the valuations in certain areas of the stock market now appear quite high. Carvana Co. is a notable example. According to FactSet, the stock price of this automotive-focused e-commerce company has risen about 370% so far this year.
Dow Jones market data shows that the valuation of the S&P 500 index has risen above 22 times expected earnings for the first time since 2021.
George Cipolloni, portfolio manager at Penn Mutual Asset Management, said in an interview last Friday, "What worries me is that we may see another round of unsustainable frenzy in the market, and people will get hurt."
Cipolloni stated that while it is hard to say whether the market's excitement has reached dangerous levels, one thing is certain: the enthusiasm and speculation in today's market are much greater than a month ago.
Some analysts on Wall Street have pointed out signs that investor optimism may be nearing excess.
Scott Chronert of Citigroup noted in a report last Friday that the bank's favored measure of stock market sentiment, the Levkovitch Index, has risen significantly in recent weeks. Although the index is still well below its highs since 2021, it has prompted Citigroup to include sentiment in its list of reasons for a cautious outlook on the market's next steps.
While some trading activities in 2021 may look similar to the present, there are many differences in the macroeconomic background.
In 2021, interest rates and bond yields were at historical lows, while the federal government was injecting massive stimulus into the economy.
FactSet data shows that as of last Friday, the yield on the 10-year U.S. Treasury bond was about 4.40%, compared to 1.50% in December 2021. Bond yields are inversely proportional to prices.
Mohannad Aama, portfolio manager at Beam Capital Management, stated that if anything is different, the higher bond yields now could be said to have increased the stakes in the market.
He said in an interview last Friday, "Bond yields are the biggest problem, the Fed is easing policy, but yields continue to rise, which is indeed a dilemma."
Mohannad added that both stocks and Bitcoin have not succumbed to the pressures of rising borrowing costs, but have instead been capitalizing on investors' enthusiasm for the 'Trump trade'.
On the downside, this makes the pricing of both assets tend toward perfection.
Mohannad pointed out that if corporate earnings do not meet investors' expectations, or if President Trump does not fulfill his promise to establish a national Bitcoin reserve, both markets could face difficulties.
Article reposted from: Jin Shi Data
