This evening, at 7pm GMT (in approximately 3 hours, Thursday morning for many of you), the Chairman of the U.S. Federal Reserve, Jerome Powell, will read the statement of the Federal Open Market Committee. This is the main tool the panel uses to communicate with investors about monetary policy.
The statement usually contains the outcome of the vote on interest rates, discusses the economic outlook and offers clues on the outcome of future votes.
The committee (referred to as the FOMC), is responsible for the formulation of a policy designed to promote stable prices and economic growth.
In layman’s language it means to control inflation and make sure that Wall Street is happy .
At the moment that translates into a bit of a tightrope exercise from the Chairman, as the latest numbers see Inflation at the highest rate in 40 years and the economy still struggling to recover from the pandemic.
The markets have already priced in previous announcements from Jerome Powell, as three interest rate rises in 2022, and a tightening of monetary policy (less money printing).
What will tonight statement tell us then?
Mainly if plans have changed and become more Hawkish (more attention given to inflation, so interest rate rises sharper and faster than expected, and a fast quantitative tightening, i.e. less money printing), or, if policy has changed to Doveish (more attention to growth and full employment, money printing galore, etc).
A Hawkish stance (more than already announced) is going to be bad news for the economy, as higher interest rates mean a larger proportion of household income will be spent on servicing mortgages and personal/credit card debts, and less money will be available as disposable income.
As a result, businesses will suffer, and the stock market would have a further downturn.
Why does all this matter for crypto?
Last year we have seen an increasing correlation between crypto and the Stock indexes (S&P500 and particularly the Nasdaq).
If we consider the S&P500 as the benchmark, like the average return to be expected for investing in stocks and shares, then other riskier options, like technology stocks for example, are seen as having a higher risk associated with it, and a corresponding higher potential reward.
This is true for a positive market, but also when the market goes down, so, in other words, riskier investments with a positive correlation accentuate the movement of the S&P500, growing more in good times and losing more in bad times.
Crypto has grown in 2021 to be considered like an investment grade asset class, albeit riskier than technology stocks, and has seen returns mimicking the Nasdaq, but with a much higher “leverage”.
Please have a look at the attached images to visually explain the correlation. The first image is the economic calendar for today. Times are in GMT, so please adapt to your own timeline if you want to observe the markets in real time as the announcement is made.
Bear in mind that expectations are for almost no news, no surprises. The FOMC should announce a rate hike in March, dismiss speculation of a half point hike (0.5%, the raise is expected to be 0.25%), and no new announcements on QT (quantitative tightening). Any deviation from this will probably move the markets.
The following graphs show the correlation between, in order of perceived risk, S&P500 (in Blue), Nasdaq100 (Orange), Bitcoin (Candle chart, red/green), and Altcoin Index (Yellow).
The first chart is of 2022 so far (doom and gloom), shows a general decline in stocks and crypto alike. The S&P500 went down over 12%, which represents almost a full year worth of growth (on average), while BTC and Alts went down over 30%. It is easy to see which assets the market regards as riskier here (do you want to guess?).
A different picture appears when we zoom out to look at 2021 (chart number 2), which can be considered a true Alt-season. Here the Altcoin dominated the charts, reaching returns of over 700% at the top.
But to really understand the up and down nature of these assets, and the fundamental difference from their stock and shares cousins, please look at chart number 3, showing us the market from 2019 to today.
What to do now?
I will leave you with a thought provoking question: what do you think is the key factor that influences the success of top Olympic athletes and business leaders alike?
Please try to answer it before reading on……
Psychologists at Harvard concluded that the key factor for success is long term thinking, and people who focus only weeks and months ahead do not achieve much in any field.
The same goes for investors. Short term thinking ends up destroying value with alarming accuracy! Long term thinking gives investors the tools to survive the ups and downs of the markets and have amazing returns.
Good luck for tonight and the following few weeks, I hope you can all negotiate these turbulent times and come up smiling at the other end.
Please let me know your comments and expectations.