
Market Discussion with Gareth Soloway, Mike McGlone, And Scott Melker
Audio Summary
AI Summary
The discussion begins with an analysis of the stock market, which remains near all-time highs despite geopolitical tensions and rising oil prices. Investors appear to be ignoring these concerns, a phenomenon described as "climbing the wall of worry." This optimism is partly attributed to the US economy holding up, with earnings season generally showing good results, particularly in AI spending. Additionally, some argue that the stock market is seen as a safer place to put money amidst soaring inflation, creating a self-fulfilling prophecy where dips are consistently bought.
A significant observation is the widening gap between older and younger equity holders. Americans aged 70 and above hold 17% of all US equities, while those under 40 own just 3%. This highlights a considerable age and wealth disparity in stock market participation.
Regarding the end of the current market cycle, one perspective suggests it could play out this year. This is supported by historically low stock market volatility, which is expected to increase significantly, aligning with surging volatility in gold and crude oil. Past gold and crypto rallies are seen as warning signals. The stock market's capitalization to GDP is at its highest since 1929 and 1936, while Treasury market prices versus gold are at their lowest since 1982. Bitcoin, which led the way up, is also expected to lead the way down.
The conversation then shifts to crude oil, noting that the Bloomberg Energy Spot Index is currently at the same price as in 2009, despite recent spikes. Natural gas prices are also similar to 1999 levels. A key investment strategy in commodities is to invest in companies that innovate to create more with less, rather than directly in the underlying commodities, which rarely sustain high prices. For example, the State Street Select Spider Index (XLE) is up 740% over a period where natural gas prices are unchanged and crude oil is barely changed.
The outlook for crude oil suggests that sustained high prices are unlikely due to excess supply versus demand, especially from the US and Canada. If prices do go higher, they are expected to fall even harder. The December crude oil futures contract is predicted to be closer to $50 a barrel, down from nearly $78. Recent spikes in gasoline and diesel prices are also noted as potential economic breakers that the stock market is currently ignoring.
On the topic of cryptocurrencies, particularly Bitcoin, near-term upside is considered, but a mid-to-longer-term outlook (six months to a year) points to potential weakness. Historically, in midterm election years (like 2014, 2018, 2022), Bitcoin tends to find lows in February and April, followed by rallies that do not prevent eventual lower prices. The next window of weakness is projected for the summer months (June-July), as interest in crypto often dries up then. A more durable bottom for Bitcoin is anticipated later in the year, possibly around October, aligning with major lows near the end of midterm years. The possibility of Bitcoin retesting the $60,000 level or falling to $50,000 is considered.
Political factors are also discussed, particularly the impact of the upcoming midterms. Markets tend to perform best when no single party controls everything, as it leads to less uncertainty. A pre-election drop in Bitcoin is typically observed after the summer. The current US administration's bravado regarding geopolitical conflicts and rising gas prices is seen as negatively impacting public opinion and presidential approval ratings, potentially leading to a "lame duck" period.
The Bloomberg Galaxy Crypto Index, a broader measure of the crypto market, is noted to be essentially unchanged for five years, demonstrating a "random walk" behavior and poor performance as an asset class. Copper, often seen as a bellwether for global economic activity, is currently lagging, suggesting that the only factor holding it up is the rising stock market. Chinese bond yields are also declining, indicating deflation. This pattern of leading beta assets lagging for extended periods suggests selling on rallies.
The discussion highlights a generational divide in investment behavior. Younger generations, particularly those who entered the market during the COVID-19 pandemic with stimulus checks and platforms like Robinhood, have experienced aggressive "V-bottoms" and a mentality of front-running market recoveries. This contrasts with older investors who experienced significant losses during the 2008 financial crisis. The question is posed whether a reckoning day, rivaling the financial crisis, could occur within the next five years.
One perspective suggests that millennials, many of whom are now participating in their first full business cycle, have not experienced a prolonged period of market reversion. While a recession within five years is generally agreed upon, the severity of a potential downturn is debated. Geopolitical uncertainty and conflicts are expected to increase over the decade, potentially leading to a major unwind, but the timing remains uncertain, possibly as late as 2028. Initial unemployment claims, a key recession indicator, are not yet at levels typically associated with recessions.
Despite recent rallies, Bitcoin's performance is viewed with skepticism. Although it broke above $74,000, it is still seen as "catching up" to a record-setting stock market, rather than leading independently. Its underperformance relative to its volatility suggests that "the glory days are over." These types of panic buying frenzies are generally considered unhealthy for the market.