Christopher Harvey, Head of Equity Strategy at Wells Fargo, sees a correlation between bitcoin and equity markets. According to Harvey, if the bitcoin bubble bursts, it very well could take the stock market along for the ride. Consequently, a stock market sell-off could cause widespread panic, leading investors to exit bitcoin positions as well.
Risk in both marketplaces adds fuel to the fire
In an interview on CNBC’s Fast Money earlier in the week, Harvey commented, “on Monday what we saw is all risk products sell off … [a sell-off] sometimes adds fuel to the fire.” The S&P 500 gained 5.62% in January, the index’s best monthly performance since March 2016. Because of this, there was a heightened sense of risk in the markets.
The January equity rally also led to more interest in cryptocurrencies, with investors eyeing the potential for big gains, which many realized in the winter 2017 cryptocurrency melt-up. Harvey aptly summarizes the environment: “Last year what you had was money chasing performance.” As risk assets soared in price, so did the feeling that the other shoe had to drop sometime soon.
Monday’s Dow sell-off coincided with bitcoin’s plummet
On Monday, the Dow Jones Industrial Average dropped 1,175 points, close to over 4% lower. Bitcoin also plunged below the $6,000 level, touching $5,947.40. This was its lowest point in about two months. The volatility in equity markets mirrored the volatility in cryptocurrency markets, as other stock indices, like the S&P 500 and Russell 2000, faced selling pressure. Likewise, popular cryptocurrencies, such as litecoin and ripple, also suffered.
When interacting with clients, advisors should be careful to accurately assess risk tolerance and advise accordingly. “We think of it more as what we have to watch out for, what we have to ... tell our clients to be careful of ... We don't make a call whether it's going to go up or down but that it's a risk in the marketplace, and it's really far out on the risk spectrum,” Harvey said in the interview.
The market outlook is still positive
Despite the early February pullback, many managers are still bullish for 2018. Wells Fargo recently raised its 2018 S&P 500 price target to 2,950, a 10% increase from previous forecasts. They also noted that cryptocurrency and equity markets should trade in correlation for the next several months. Some Wells Fargo strategists, like Harvey, believe the crypto markets will be less risky when regulatory measures are established.