Since the market’s most recent bottom on June 16, we’ve seen many of the styles and sectors that led us into bear market territory lead us towards a potential way out.
And this week’s post-earnings reactions from names like Amazon (AMZN) and Microsoft (MSFT) show investors are still itching to give companies the benefit of the doubt. All of which makes the action in names like Meta Platforms (META) more painful.
Which brings us back to bitcoin.
In May, bitcoin’s correlation with stocks peaked at 0.82. The max correlation for any asset pair is 1, meaning these assets would move the same direction by the same magnitude.
But this correlation between stocks and crypto peaked as both markets were on the way down after the implosion of stablecoin Terra. Since then, crypto markets had generally been lagging the stock market and sitting out this recent rally. The spike in the correlation between these asset classes in recent days again shows the character of this new environment — “the riskier the better.”
As stocks have risen amid optimism around the Fed’s plans, crypto assets have risen, too, with the correlation between bitcoin and the S&P 500 back near 0.7.
Fed Chair Jerome Powell catalyzed this risk ramp on Wednesday when he emphasized repeatedly the Fed will be “data dependent” going forward, effectively ending a 15-year experiment with transparency.
Markets will no longer hang on the economic projections of economists and Fed officials at the Marriner Eccles building in D.C. Throw those Summary of Economic Projections out the window.
The markets now live and die by actual data, as they once did. For hardcore Fed watchers, this means the stakes just got raised for the next few rounds of inflation data.
The next Consumer Price Index is in two weeks, and the Fed’s preferred measure of inflation — Personal Consumption Expenditures — drops today.
The Fed also watches inflation expectations carefully, and the University of Michigan’s Consumer Sentiment data, which measures inflation expectations up to 10 years out, is also expected later this morning.
When these two reports surprised to the upside just before the June meeting, the Fed made the decision to raise rates by a more aggressive 0.75%, which at the time was the biggest increase since 1994. Earlier this week, this move was matched.