Following its record high on March 28, the S&P 500 has experienced a decline, falling below the 5,150-point mark on April 12. Bitcoin (BTC) has also reacted negatively during this period, prompting the need to assess whether the factors driving the stock market correction also apply to cryptocurrencies.
The 2.9% drop in the S&P 500 index from its peak of 5,333 may seem insignificant, but it signifies the first time in four weeks that the U.S. stock market index has traded below 5,120. Investors have begun doubting the Federal Reserve’s (Fed) ability to effectively lower interest rates throughout 2024 due to persistently high inflation.
The recent quarterly reports from major U.S. financial institutions such as JPMorgan and Wells Fargo on April 12 revealed a 4% decrease in net interest income. This figure represents the difference between banks’ earnings on their assets and what they pay to customers. This issue resembles the challenges faced by smaller banks in 2023. JPMorgan’s CFO, Jeremy Barnum, highlighted the shift of customers from traditional savings accounts to higher-yielding alternatives like certificates of deposit (CDs). This shift explains why JPMorgan’s stock fell 5.7% on April 12, despite a 6% year-over-year increase in net profits for the first quarter. JPMorgan CEO Jamie Dimon also emphasized the risks posed by geopolitical tensions and further quantitative tightening by the Fed.
The main reason for the current stock market downturn is persistent inflation, leading to the central bank maintaining higher interest rates and reducing liquidity. However, this situation could be viewed as positive for Bitcoin, as the cryptocurrency, like gold, benefits from being a scarce asset. Gold reached a record high of $2,431 on April 12, but this alone did not cause market concerns.
On April 10, the yield on the U.S. Treasury 5-year note reached its highest level in five months, indicating investor discontent with returns below 4.5% in light of the inflation outlook. This situation has two significant consequences: first, the government faces higher costs for refinancing its debt, and second, companies are discouraged from hiring and expanding due to more attractive fixed-income returns.
As gold prices rise and investors seek higher yields in U.S. Treasuries, it reflects a lack of confidence in the economies. Under such circumstances, advocating for Bitcoin investments is challenging, regardless of inflation trends. With only a minority of market participants considering Bitcoin as a safe haven, suggesting that the cryptocurrency could thrive during a stock market downturn is speculative at best.
In addition to the stricter monetary policies by the Federal Reserve and the diminishing confidence in the U.S. economy, China has become a significant concern due to issues in its real estate sector and disappointing foreign trade figures. China reported a 7.5% year-over-year decrease in exports in March, which was more severe than the anticipated 2.3% decline. Analysts are concerned about overcapacity in certain Chinese industries and do not foresee a rapid recovery due to the ongoing crisis in the property sector.
Fitch’s rating agency downgraded China’s sovereign credit rating to negative on April 10 as the country plans to issue $138 billion in long-term bonds to stimulate economic growth. Banks in China reported bad loan property ratios as high as 5% at the end of 2023. Some of the largest real estate developers in the region, including Evergrande and Country Garden, have recently declared bankruptcy.
China introduces significant uncertainty into global markets, but its impact on Bitcoin prices remains uncertain. However, it would be overly optimistic to expect investors to increase their cryptocurrency holdings if the S&P 500 continues to decline.
This article does not provide investment advice or recommendations. Every investment and trading decision involves risk, and readers should conduct their own research before making a decision.