Of Bonds and Bitcoins

 

It’s good for everyone when stocks keep rising.

On Wednesday the Dow Jones Industrial Average closed above 26,000 for the first time ever, while the S&P 500 registered its first post-2800 close. The Dow and S&P sold off a little bit, but the Nasdaq Composite index topped 7300 in Friday’s trading. Another day, another milestone, it seems, in this market.

This is when people like me start worrying about what could possibly go wrong, and if you scan the headlines, you’ll find two big concerns—bonds and bitcoin (and other cryptocurrencies).

As I wrote here and in my MarketWatch column last week, bond yields have risen steadily over the past few weeks as investors have sold out of fear of a stronger economy and looming inflation. (When investors sell, bond prices fall and yields rise to attract buyers.) Some have warned that could cause a big correction in stocks.

The other big news is bitcoin, which fell Wednesday (just as stocks peaked) to $9,200, having peaked at $19,500 per coin at the height of the frenzy in December. On Friday, it had rallied back to $11,600.

Do either of these pose any danger to stocks?

Let’s start with bitcoin. I don’t own any and I certainly don’t recommend them in any GoldenEgg Investing® retirement investing plans. But while stocks’ volatility is amazingly low, bitcoin’s is off the charts: Moves of 10-20% a day are common.

Bitcoin is already down 40% from its peak. But if it really crashes, I don’t think stock investors should be too worried. Why not? Because bitcoin is a classic niche investment—or, more accurately, speculation. Its total market value is less than that of one stock, Microsoft. If Microsoft crashed, would that bring down the whole market? Not unless a lot of other stocks were going down with it.

Bitcoin’s fans are often millennials—a survey showed 27% of millennials would rather invest in bitcoin than in stocks—and overwhelmingly male (97%). The “bitcoin bros” are totally atypical of most investors, who save and invest mostly through index funds or ETFs in their retirement plans or 401ks. They couldn’t care less about bitcoin and would shrug off any bigger decline in cryptocurrencies.

On the other hand, a big selloff in bonds—and surge in yields—could shake stock markets because so much of the economy rests on rates. But I think there’s far too much fuss over the supposed magic yield of 2.6% or 2.63% on the ten-year U.S. Treasury note; I actually think yields could go much higher, even to 3.25% or 3.5%, before we see a real bear market in bonds.

To summarize, bitcoin has sold off big but it has limited consequences. Bonds have a major impact but they haven’t dropped that much. Neither is a big threat to stocks  now.

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