Investors Shouldn’t Worry Right Now (Except About Crypto)

Investors Shouldn’t Worry Right Now (Except About Crypto)

I’d say the Fed came out with news that didn’t exactly please Wall Street, but that august body didn’t need to contribute to a mood of panicked sell-off.

Tuesday the S&P 500 closed at 4,127.83. Then came Wednesday, with the regularly scheduled Federal Reserve Open Market Committee (FOMC) meeting, and an opening at 4,098.45.

(Temporary interruption: Why do media people often look at the Dow when it’s 30 big companies that hardly represent the breadth of the economy? Because of habit and the numbers are bigger, so more important sounding. Now back to normal.)

Yes, we were looking at the S&P 500, a view of large-cap business, though it could also have been the small- to mid-cap Russell 2000 that closed Tuesday at 2,210.88 and opened at 2,205.77 for an additional rounded view.

And except for some morning jitters, things moved back up during the day up to the report of the FOMC and then continued. Stocks were down from yesterday, but the percentages were -0.29% for the S&P 500, -0.48% for the Dow, -.03% for Nasdaq
NDAQ
, and -0.78% for the Russell.

Pretty non-eventful, you might thing. Numbers shake back and forth all the time, even when on a long run, whether up and down. Daily numbers tell you nothing. Or so reality would suggest. Then there’s the coverage

Big news

CNBC’s Trader Talk had the headline, “Traders are now worried that the Fed isn’t being proactive enough.”

Investor’s Business Daily: “Dow Jones Slumps 375 Points As Bitcoin, Tesla Plunge; Cisco Systems Holds Up Ahead Of Earnings”

Barron’s: “Global Stocks Tumble on Inflation Worries”

Wall Street Journal: “Stocks Pare Losses After Broad Retreat From Riskier Assets”

New York Times
NYT
: “Fed officials began to tiptoe toward a conversation about dialing back support for the economy, minutes show”

Wall Street Journal: “Bitcoin Falls as Much as 30% as Investors Sour on Cryptocurrencies”

Worry, danger, uh oh at the top and some good points by the bottom.

As I mentioned on Twitter earlier today: “Folks, y’all gotta stop looking at point drops on markets and consider percentages. 300 points off the Dow these days isn’t anything like it was 20 years ago. Markets gonna jitter a bit. No need to overreact.”

Numbers always have a context. The “OMG, HUNDREDS OF POINTS! HUNDREDS OF THEM! Did I mention HUNDREDS OF POINTS!” approach to economic news is an utter mistake. The percentage drops we’re seeing today are unimportant—unless they keep up for an extended period of time, in which case it might be a market returning to a less overheated norm.

It’s an entertainment, otherwise known as a marketing, approach. Fear is one of the great emotional drivers of people. So is greed. And if you can flip back and forth, it’s a great way to keep a moneyed, or would-be wealthy, audience coming back.

Economic recovery

The country is in the process of an economic recovery. That will take time. The supply chains that keep products coming are out of step at the moment with the demands people are showing. This happens sometimes and when it does, prices rise or drop, depending on the imbalance between supply and demand.

Big bad inflation coming? If you’re relatively young, go ask someone who went through the 1980s and ask what inflation can do when it starts to rise, like 13% early in 1980 for a whole lot of reasons, including an energy crisis and a country still learning to come off the gold standard as it did in 1971. That was a huge shakeup and took a long time to work through.

Here’s a point from Peter Essele, vice president of investment management and research at Commonwealth Financial Network, which came over in a statement:

Although the 4.2 percent rise in prices over the past year was a noteworthy print, the numbers suggest that it wasn’t a broad-based increase across all goods and services. In fact, of the major expenditure categories used to calculate the headline number, only a few came in above 4.2 percent. Energy commodities, used cars and trucks, and transportation services (specifically, airfare and vehicle insurance) stood out, which saw yearly price increases of 47.9 percent, 21 percent, and 5.6 percent, respectively. All other major expenditures were in line with long-term averages. The three aforementioned categories account for only 12 percent of the CPI basket of goods and services. Because they experienced such significant increases, the overall headline number was pulled higher, landing above recent averages. The largest component of CPI (shelter) came in at 2.1 percent, compared with a 10-year average of 2.76 percent.

Context is everything.

Big bad crypto

I’m sure the following will tick off crypto fans who are certain they take part in a refashioning of economic reality. (In the late 1990s and early 2000s, there were plenty in the dot com bubble who were certain that the underpinning of business had changed, that making a profit was no longer profitable if you could get plenty of “eyeballs.” I chuckle a little remembering hearing people seriously suggest that for a short period.)

The Journal’s take on crypto today was perhaps the most interesting part of economic and business news:

Cryptocurrencies have surged over the past year on a wave of speculative excitement, spurred by famous backers as varied as Elon Musk, Paul Tudor Jones and Snoop Dogg.

That gave the small but growing crowd of bulls a feeling of inevitability that cryptocurrencies would mature into a significant asset class in their own right. Bitcoin, they wagered, might even fulfill its initial vision and become a legitimate alternative currency.

But the same momentum that drove prices higher is now sending them relentlessly lower.

True currency has a number of requirements, like the ability to hold value and the wide recognition of its value. As with any asset, value depends on perception. People must have faith. Fiat currency—the money printed by countries—doesn’t have inherent value. Neither does hard money, for that matter, because they depend on the trust in the underlying backing. (If you were hungry and stranded on a desert island but had $400,000 in gold bullion sitting next to you, it would have zero value to you. Really.)

But when countries support fiat currencies, they usually have many resources that directly or indirectly support them: investments, commodities that they extract, debts owed by other countries, intellectual property, military power, international influence, and so on.

Crypto is all trust, no backup, unless they try to tag themselves to, ironically, a fiat currency like the dollar. As fast as it can rise, it can drop precipitously as well. The lack of sticky value, the ease of moving perceptions, can work for or against.

An asset that depends on excitement and ongoing investment can trip and fall. Will some of these cryptoassets rise again? Maybe. And there’s something certainly to be said for the technologies behind them. But the more you depend on crowds, the more you will find that they can let you down when you can least afford it.



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