Market Commentary
Market Commentary: The Plot Thickens
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March 8, 2022

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Key Takeaways:

  • The second week of Russia’s invasion changes sentiment for some as inflation in key commodities leads to concerns for economic growth
  • The Federal Reserve chose to maintain QE and ZIRP through nine months of 5%+ inflation, and is now expected to hike amidst a war in Europe
  • Bitcoin and ether remain higher than lows placed in late January, while equities closed at a new year-to-date lows on Monday
  • Comparing bitcoin’s drawdown to equities illustrates the magnitude of the “macro specific” pullback

The Focus

With another week of Russia’s invasion of Ukraine, markets begin to worry of the potential knock-on effects that could impact economic growth in the coming quarters.

While bitcoin and ether decoupled against equities last week, (bitcoin +4.3%, ether +1.0%, SPX Index -1.3%, Nasdaq Composite -2.8%), heightened concerns of a drawn-out war and potential impact on inflation and growth has again led to broad sell-off across risk assets. Commodity prices have risen dramatically, and with the potential for bans on Russian oil imports, the likelihood of persistent commodity inflation remains high.

The Federal Reserve chose to continue quantitative easing and zero interest rate policy for nine months while inflation gained 5%+ year-over-year, and now the group of policymakers is planning a hike amidst a war in Europe in the upcoming FOMC meeting on March 16th.

With increasing economic concerns, volatility has remained high, and growth, momentum, and technology equities rolled over into new year-to-date closing lows on Monday. The Nasdaq Composite officially entered into “bear market” territory with a drawdown of 20% from its 52wk highs. 

Despite this weakness, bitcoin and ether continue to trade higher than the lows in late January.

Bitcoin and digital assets are supported by secular trends such as digitalization, innovation, and demographics to name a few, and macro events accelerate adoption in various periods of time.

This most recent geopolitical turmoil is likely one of these macro events. Awareness of bitcoin as a decentralized and non-sovereign alternative to fiat has grown rapidly in just a few weeks.

And while some members of Congress believe crypto can be used to bypass financial sanctions, they must remember that transactions are fully traceable. Crypto enables for the tracing and blocking of specific addresses, while allowing ordinary citizens to utilize these assets as lifelines and alternatives to FX volatility.  

So, while for now bitcoin is susceptible to economic and market risk, performance illustrates the asset is “down, but not out.” As we believe, this time will likely be viewed in hindsight as an accelerator to education and demand for bitcoin as a “macro asset.” 

Investors now have an easy reference point for price action: will equities continue to make new lows, dragging down bitcoin and ether with it? Or are the lows of the year near with a “not so bad” rally to ensue as volatility eventually normalizes? 

While the current landscape continues to test the conviction of investors, the eventual moving past of these “overhangs” should bode well for risk assets, bitcoin and ether included. President Biden’s upcoming executive order on digital assets is expected to be signed this week, which we will continue to monitor developments around.

For now, investors have the opportunity to practice patience, maintain conviction, and if warranted, add to long-term positions on weakness rather than at all-time-highs. 

Equities Have Entered New Lows, Bitcoin and Ether Remain Higher than January FOMC

We update our “Tantrum Table” that monitors a variety of risk assets impacted by recent uncertainties around the Federal Reserve’s process of normalization and now, geopolitical risk. While many of these lows prior to Russia and Ukraine tensions were around January’s FOMC meeting, new closing lows have been placed in many equity indices and sectors. We note that intraday lows for equities was on February 24th. As of Monday, March 7th:

Relative Drawdowns Illustrate Macro Specificity

We often mention that this pullback from all time highs in digital assets has been in “good company” with equities, as the two have drawn down in synchrony on concerns of monetary policy and geopolitical risk.

Instances such as early 2019 (drawn out bear + hash wars) and mid-2021 (China bans mining) can be considered bitcoin specific, as equities remained near or at all time highs while bitcoin receded.

Now, as of Monday’s close, the Nasdaq was 20.2% from it’s 52week highs, while bitcoin was 44.1%. Here, we can see that the pullback is “macro-specific.”

Click here for the full PDF. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Director of Research

Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
Price Volatility of Digital Assets – A principal risk in trading Digital Assets is the rapid fluctuation of market price. High price volatility undermines Digital Assets’ role as a medium of exchange as consumers or retailers are much less likely to accept them as a form of payment. The value of client portfolios relates in part to the value of the Digital Assets held in the client portfolio and fluctuations in the price of Digital Assets could adversely affect the value of a client’s portfolio. There is no guarantee that a client will be able to achieve a better than average market price for Digital Assets or will purchase Digital Assets at the most favorable price available. The price of Digital Assets achieved by a client may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on the blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or other Digital Asset users and market participants; perceived or actual Digital Asset network or Digital Asset security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events.
Digital Asset Service Providers – Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of virtual currency (i.e., banks, accountants, exchanges, digital wallet providers, and payment processors). However, there is no assurance that the virtual currency market, or the service providers necessary to accommodate it, will continue to support Digital Assets, continue in existence or grow. Further, there is no assurance that the availability of and access to virtual currency service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support virtual currency may not do so in the future.
Custody of Digital Assets – Under the Advisers Act, SEC registered investment advisers are required to hold securities with “qualified custodians,” among other requirements. Certain Digital Assets may be deemed to be securities. Currently, many of the companies providing Digital Assets custodial services fall outside of the SEC’s definition of “qualified custodian”, and many long-standing, prominent qualified custodians do not provide custodial services for Digital Assets or otherwise provide such services only with respect to a limited number of actively traded Digital Assets. Accordingly, clients may use non- qualified custodians to hold all or a portion of their Digital Assets.
Government Oversight of Digital Assets – The regulatory schemes—both foreign and domestic—possibly affecting Digital Assets or a Digital Asset network may not be fully developed and subject to change. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets, resulting in a change to its value or to the development of a Digital Asset.
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