Bitcoin’s rise to over $100,000 has caused shares of some companies that deal with cryptocurrencies to go up by huge amounts. But it makes people wonder what it could mean for the rest of the stock market.
As the groundbreaking cryptocurrency BTCUSD -1.50% approaches another round-number milestone, some analysts say its rise is becoming yet another sign that markets may be getting too hot.
People are worried that investors’ desire for risky assets, like bitcoin and stocks, is getting close to the high levels that were last seen in 2021. As many of you may remember, investors made a lot of money during that time. But in the end, it set the stage for a terrible bear market the next year, which caused new buyers to lose a lot of money.
In some parts of the stock market, prices look incredibly high, just like they did back then. One good example is Carvana Co. CVNA 4.42%; according to FactSet data, shares of this car-focused e-commerce company have gone up about 370% so far this year.
As of late, the S&P 500 SPX 0.35% was worth more than 22 times next year’s earnings, which was the first time since 2021 that this had happened.
MarketWatch talked to George Cipolloni, a portfolio manager at Penn Mutual Asset Management, on Friday. “My fear is we’re going to get another round of this crazy market that can’t last, and people are going to get hurt,” he said.
It’s hard to say if the rush of happiness in the markets has hit a dangerous level, but Cipolloni said that there is a lot more excitement and froth in the market now than there was a month ago.
Some people on Wall Street have pointed to signs that investors may be too optimistic.
Scott Chronert of Citigroup said in a study released on Friday that the Levkovitch Index, which is the bank’s favorite way to measure how people feel about the stock market, has gone up a lot in the last few weeks. Citi has added mood to its list of reasons to be cautious about where the market might go next, even though the index is still well below its highs from 2021.
Thoughts of 2021
Even though some trades may look the same, the financial situation today is very different from what it was in 2021.
In 2021, interest rates and bond prices were very low, and the government was pumping a lot of money into the economy to boost it.
If you look at figures from FactSet, the yield on a 10-year Treasury note (TMUBUSD10Y 4.411%) was around 4.40% on Friday. This is down from 1.50% in December 2021. Bond rates go down when bond prices go up.
A fund manager at Beam Capital Management named Mohannad Aama said that higher yields may have made the market more risky.
Asama told MarketWatch on Friday, “Yields are the biggest question mark here because we have a Fed that is easing but yields that continue to rise, which is really a conundrum.”
Aama also said that stocks and bitcoin have not given in to the pressure of higher borrowing costs. Instead, they have been riding the excitement of the “Trump trade.”
The bad thing is that this has made the prices of both assets perfect.
Aama said that the two markets could be in trouble if corporate earnings don’t live up to investors’ hopes or if President-elect Trump doesn’t keep his promise to set up a national bitcoin reserve.
A lot of good news is already priced into the S&P 500 and the Nasdaq, he said. “If that doesn’t happen, it’s going to be a problem.”
U.S. stocks all ended the week higher on Friday. The S&P 500, the Nasdaq Composite COMP 0.16%, and the Dow Jones Industrial Average DJIA 0.97% all had weekly gains, and the Dow set a new record close.
