Crypto Provides a Guide on Sentiment: 3-Minutes MLIV

Key Concepts:

• Tech Selloff
• S&P 500
• Stock Market Rally
• Correction
• Bubble
• Earnings Story
• CapEx (Capital Expenditures)
• Demand
• Revenue
• Crypto
• Leading Indicator
• Sentiment
• Retail Wealth Factor
• Correlation
• Digital Asset Treasury Companies
• Bond Market
• US Ten-Year Treasury Yield
• Inflation Risk
• Cleveland Fed
• Steepening of the Curve
• Fiscal Concerns
• Supreme Court Decision on Tariffs

Tech Selloff and Stock Market Outlook

The discussion begins by addressing the recent tech selloff, noting that the S&P 500 has dropped 3% from its peak. The speaker's bias is that this drop will continue, though they emphasize that 3% is "pretty irrelevant" given the "extraordinary gains" seen earlier in the year. The past six months have been characterized by a "straight line rally with almost no pullbacks." The current few percent drop is not considered a "proper kind of correction."

Despite this short-term bearish bias, the speaker maintains a positive long-term outlook for stock markets, expecting them to make "fresh records in the coming months." This optimism is driven by the dominant theme of strong earnings, "extraordinary" CapEx, and persistent demand. The speaker believes the market is in a bubble but "not near the end of that bubble." The "problem on the revenue side is not yet coming into play." Therefore, while short-term fluctuations are expected, the overall trend is upward. The speaker admits to having "low conviction" regarding the timing of further pullbacks in the coming weeks, but their bias is that a "proper correction" is yet to occur, leading to lower prices in the short term.

Crypto as a Leading Indicator

The role of cryptocurrency as a potential "canary in the coal mine" for the broader market is explored. There's an ongoing debate within the team about what constitutes a leading indicator, and recently, crypto has appeared to be one. However, the speaker highlights that over the past year or two, the "crypto investment base doesn't overlap with a large part of the the macro investor base," leading to a lack of a "strong correlation."

Despite this, crypto does affect "sentiment" and the "retail wealth factor," which in turn influences other market segments. While a "material correction in crypto" might not "collapse the rest of the market," it can "drag" it down. The speaker believes the crypto space is currently undergoing a "material correction," particularly affecting "digital asset treasury companies." This negative sentiment in crypto is seen as a reason why the "broader pullback has more to go," though not expected to be "dramatic."

Bond Market and Inflation Concerns

The conversation shifts to the bond market, specifically the US ten-year Treasury yield, which is currently around 4.09%. The Cleveland Fed has issued warnings about inflation risks. The speaker believes the ten-year yield has "much harder to go" higher. However, they offer two significant disclaimers:

1. They previously held this view in August and were "horribly wrong."
2. They are concerned that the "steepening of the curve is becoming a bit consensus," which can be a contrarian indicator.

The speaker anticipates that "fiscal concerns will come back into play" and that a "Supreme Court decision on tariffs" could also create concern. Coupled with the ongoing "inflation story," the speaker reiterates their belief that "ten year yields are going a lot higher again," acknowledging their past misjudgment on timing.