Markets stabilize - earnings season outlook, bitcoin: is the correction over? curse and blessing of additional regulation

Chart of the week

To understand the chart, you have to look a little closer, but it is worth it. The dark blue line shows the growth/value ratio. A rising line means that growth stocks have the better return than value stocks. The light blue line shows the real interest rates of the 10-year U.S. Treasury bond inverted. A rising line means falling interest rates and a falling line, rising interest rates.

Why this matters:

The chart impressively shows that in periods of falling interest rates, growth stocks have a much better return than substance stocks. The announcement of the U.S. Federal Reserve to raise interest rates up to three times in the year changes the favorite role. Real interest rates may rise into the region of +0.5 to +0.8%. This suggests a strong outperformance of value stocks in the year.

Markets stabilize

On Wednesday after the U.S. Federal Reserve did not turn the interest rate screw further than feared, the markets have stabilized somewhat.

The chart shows the return of individual sectors after the Federal Reserve press conference. Higher interest rates have a very negative impact on the return of technology and real estate companies. We expect this chart to be representative of sector returns through at least mid-2022.

The chart of the AAII (American Association of Individual Investors) shows how negative the sentiment is. It has fallen to a lower level than after the 2020 Covid crash. We consider this fear to be exaggerated and assume a counter-reaction, i.e. rising stock markets.

For a detailed analysis, I refer to our special market report from this week.

Outlook for the earnings season

Last week, the first companies published earnings for the fourth quarter of 2021. The market expects an average increase of 20.6% year-on-year. This week, only 26 companies have published results and 73% of them have exceeded expectations. However, even these companies lost over 2% after the announcement. We expect further good results to calm the markets in the next 2-3 weeks.

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Bitcoin: Is the correction over?

Bitcoin has corrected over 50% since the high in November 2021.

As can be seen on the chart, a correction of over 50% is nothing really out of the ordinary. Last year from May to July we saw a similar correction and a few months later a new all-time high.

The main reason for the sell-off since November was almost exclusively investors from Asia:

The chart shows in green and red the return of bitcoin at the opening hours of the Asian exchanges. This impressively shows that almost all the selling pressure came from Asia. Investors in the U.S. and Europe bought Bitcoins in addition.

This large wave of selling by Asian investors were due to the Chinese government's crypto ban. This selling wave is now ebbing,

The chart shows the buying and selling behavior of each investor group. In the top line are the investors holding over 1000 Bitcoins (over 40 million USD equivalent). These investors are called the whales. Since over 70% of all Bitcoin holdings are in the hands of this group of investors, their behavior is crucial to the price trend.

By the end of the year, the whales had sold massively. This was especially the miners from China, who had to sell all their Bitcoins. Since one week, the whales are again accumulating Bitcoins. Which gives hope for further stabilization.

Bitcoin: the curse and blessing of additional regulation

The White House reclassifies Bitcoin and cryptocurrencies as security relevant. Biden will therefore issue an executive order in the coming weeks to task federal agencies with assessing the risks and opportunities of cryptocurrencies. This will involve teams from all agencies working together. The goal is to come up with a unified regulation, and coordinate it with other countries as well.

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Now is this good news or bad news? It's not so clear.

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Negative interpretation:

Bitcoin was created to have a monetary system independent of central banks and governments that cannot be manipulated and controlled by them. Bitcoin should be managed and developed by the users themselves. To agree to regulation is a betrayal of the basic philosophy of Bitcoin. Regulation is the natural enemy of decentralized currencies. And because they are decentralized, regulation is not possible, because it will always move to countries that have no regulation.

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Positive Interpretation:

The idea of bitcoin and cryptocurrencies in general has evolved. Enormous technical possibilities exist and will reinvent the Internet. Billions have now been invested in projects based on cryptocurrencies. NFTs and smart contracts have the potential to permanently change our lives and the economy.

But the technology is at a crossroads. Due to a complete lack of customer protection, a Wild West mentality has emerged. If a unified system is not created in which cryptocurrencies can thrive, the technology will not find its way into the mainstream. Many investors in cryptocurrencies therefore see moderate regulation as a condition for their business model to develop.

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The question will be whether governments succeed in creating a uniform regulatory framework that is also accepted by users. Too much regulation would destroy cryptocurrencies as we know them; moderate regulation would take them to unimagined heights.

This regulation discussion will be with us for the next 6-12 months. Partial information from the White House working group will keep leaking out. These may trigger a crash or spark a big rally. Investments in cryptocurrencies will still not be for investors with weak nerves in 2022.