Bitcoin And Bonds Rally, As Stock Momentum Stalls On Profit-taking — What Is Next

Bitcoin and Treasury bonds led another rally on Wall Street as momentum for stocks stalled on profit-taking.

The digital currency traded close to the $70,000 mark after crossing the $60,000 mark a week earlier. It was up 2.3% for the week, on solid interest from the newly established ETFs, the prospects of lower interest rates, and a tighter supply on the upcoming halving in April.

Treasury bond prices continued to rise for another week, too, driving yields lower. The benchmark 10-year bond ended the week at 4.08%, down from 4.19% a week earlier and 4.29% a couple of weeks ago.

Traders' and investors' enthusiasm for Bitcoin and fixed-income securities follows Fed chair Jay Powell's rather dovish Congressional testimony Wednesday.

"The Fed's overall messaging is one of acknowledging the progress made so far on inflation while remaining careful about easing too soon and re-igniting a demand-led echo wave of inflation," said Steve Wyett, Chief Investment Strategist at BOK Financial.

"Jay Powell indicated the FOMC will be cutting rates at some point this year, sending risk assets much higher," added Alan Mittleman, Chief Operating Officer at Secure Digital Markets.

Then, a couple of government reports were released Friday, indicating the cooling of the labor market. First, the payroll report showed that the U.S. economy added 275,0000 jobs in February 2024, beating forecasts of 200,000, but the January numbers were downwardly revised to 229,000.

"This helps reinforce the message that January's data shouldn't be viewed as the start of a trend and supported markets increasing their expectations for a June rate cut," explained Michelle Cluver, Head of ETF Model Portfolios at Global X.

Second is the household report, which showed that the unemployment rate increased from 3.7% in January to 3.9% in February. It helped constrain hourly wages, which increased by 5 cents, or 0.1%, over a month to $34.57 in February 2024. These moderate gains followed a downwardly revised 0.5% increase, the smallest wage hike since February 2022.

The moderation of wage pressures eased inflation fears among traders and investors, validating Wall Street's obsession with interest rate cuts.

"Despite this month's job growth, we are hopeful this strength will not deter the Fed from beginning rate cuts in the near term," said Steve Rick, Chief Economist at TruState.

"Moving forward, we expect inflation to bounce between 2% and 2.5% in 2024 as it gets further under control and is hopeful that it will settle to the natural rate of 2% in 2025," Rick added.

The prospects of lower inflation and interest rate cuts raised Wall Street's appetite for risky assets like Bitcoin and fixed-income securities like treasury bonds.

The situation is slightly different for stocks, as a slowing economy could eventually take its toll on corporate earnings. It gave traders an excuse for profit-taking, prompting a sell-off on Friday afternoon, erasing the previous days' gains.

The S&P 500 ended the week at 5,123.68, down 0.70%; the Dow Jones at 38,722.69, down 0.20%; the tech-heavy Nasdaq at 16,085.11, down 1.20%; and the Russell 2000 at 2,082.71, down 0.10%.

Mittleman expects the rally in risky assets to continue. "It seems like this rally in all risky assets will continue for the foreseeable future," he said, adding, "In the crypto space, we're seeing a lot of demand for deep out-of-the-money calls. The 200,000 strike calls expiring in December are trading for 4%. It seems expensive, but I wouldn't want to short a bull market!"

Still, Wyett sees Bitcoin as speculative and cautions investors to "speculate responsibly, attributing the rapid increase in the price of the digital currency to the elevated level of liquidity in the capital markets."

Meanwhile, he believes the bond market will continue to try to price in a variable timing and amount of Fed easing this year. "After beginning the year with an aggressive view of Fed rate cuts, economic data has led to a reduction in the number of cuts and a slower start to rate reductions," Wyett added.

As for stocks, Wyett sees the broadening of the rally within the S&P 500 and across mid- and small caps. "We cannot say stocks are cheap from a valuation standpoint, but neither are they egregiously expensive," he said, adding, "We would expect performance in the large-cap growth areas to slow a bit from here, but other areas of the market still have room to move higher within an economy that continues to grow."