What was the best performing asset class in the third quarter? Believe it or not, it was Bitcoin.
The world’s largest cryptocurrency topped the ranks with a boisterous 3.1% return. Hmm.
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Yes, perhaps nothing sums up the abominable market better than the best-performing asset class trailing as barely a positive. Precious metals returned 1.3%, while cash investors rejoiced at a 0.2% return. Any other asset class? Negative.
As inflation rumbled, the Federal Reserve raised rates, sending markets into a tailspin. Add in a war in Europe, an energy crisis as winter approaches, and a myriad of other bearish factors, and it begins to make sense of why the market has crashed.
Bitcoin one of the worst assets to hold
Looking at annual returns, rather than just the third quarter, paints a different story. Bitcoin has plummeted, losing more than half its value so far, far south of other major asset classes, as the chart below shows.
Since the market has moved away from risk, returns have generally been in line with what is expected during bear markets. That is, the further down the risk spectrum, the more assets have fallen.
For cryptocurrencies, this is bad news and the reason Bitcoin has been so rotten. It also explains how almost every other cryptocurrency has fallen more than Bitcoin.
Looking at the figures above, the S&P is down 25%, roughly halving that of Bitcoin. In fact, I would have guessed it would be more, if you had asked me earlier in the year where Bitcoin would be if the stock market fell 25%.
The Nasdaq is further down the risk curve, with a more technological focus, down close to 30%. And gold does what gold does: it holds.
The dollar is the best performing asset
In times of crisis, investors flock to safe haven assets; For evidence of this, look no further than the fact that the US dollar has been incredibly strong so far this year, dominating nearly every currency in the world.
After all, there is nothing safer than the US dollar. Adding to this fact is that many liabilities around the world are denominated in USD, which means that debtors struggle to obtain dollars. Additionally, the Federal Reserve has risen more aggressively than many other major currencies, such as Europe and Japan, attracting capital inflows to take advantage of higher yields and thus further strengthening the dollar.
What does Q4 contain?
The fate of Bitcoin, stocks, and other assets in Q4 will largely depend on inflation and rising interest rates (what’s new?).
The next CPI reading is on Thursday (Oct 13the) and therefore we should see volatility to close out the week and a sign of what things could hold for the fourth quarter. If inflation fails, expect a hawkish Fed and more selloffs across the market.
But if the fourth quarter can deliver decent CPI readings and avoid major negative macroeconomic implications, it could at least be ready to ride out what was a terrible third quarter. In other words, in the short term, nobody knows. But the next part is putting all eyes on Jerome Powell this Thursday.
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