When You Can’t Sell What You Want, You Must Sell What You Can

Are US investors THAT worried about the economy? Or is carnage from the crypto markets spilling over the stock market?

In my January 24th International Business Times column “What Candlestick Charts Tell Us About Bitcoin’s Next Move” I concluded:

“Should bitcoin trade below $30,000, the next floor dates back to September 2020 at around $10,000.

Anyone who bought bitcoin prior to January 2021 is still showing some gains. However, anyone who bought bitcoin since January 2021 is at best at breakeven and at worst showing a 50% loss. Sadly, most recent investors are undercapitalized retail investors buying on a hope and a dream. Those investors are most likely to sell with the next decline.”

At the peak levels of November 2021, investors owned about $3 trillion in cryptocurrencies (the entire US stock market is $48 trillion.) At present cryptos total $900 billion.

Bitcoin is not at $10,000 yet, but with the price falling every week for the past 12 weeks to $21,000 for a net decline of 55%, those retail investors are scared. Worse, the exchanges for buying and selling cryptocurrencies (Coinbase, Crypto.com, Celsius) are freezing up, so you can’t get out even when you want to.

When you can’t sell what you want, you must sell what you can!

Much of the selling pressure of the last 3 months comes from newbie investors dumping crypto but also FAANG stocks, meme stocks, and the general S&P 500.

I believe there’s a substantial disconnect between the US stock market (bear market) and the US economy (getting along, with issues) that is creating an opportunity for investors who can stomach volatility.

Everyone knows the litany of concerns: high inflation, high energy prices, high food prices, rising interest and mortgage rates, supply chain problems and labor shortages all pointing to one “logical” conclusion - recession!

With one step forward and three steps back, stock prices worked their way back to levels last seen on January 1st, 2021. At that time, investors were thrilled at how well the stock market had performed during the onset of the pandemic; but now despair with the S&P 500 down 23.8%, NASDAQ down 33.3% from the record highs of just 6 months ago.

As we always say, the stock market ultimately only cares about three things:

• Company revenues – currently at record levels, up 22% from a year ago
• Company earnings – currently at record levels, nearly double from a year ago
• Interest rates – well above the all-time lows set during 2020, but average for much of the decade prior to March 2020.

At the start of the year, we said that solid revenues and earnings would push stocks higher this year, while rising rates would push stock lower, for net gains of 6-8% by year-end.

To achieve gains of 6% at this point, stocks would have to rally 39% in six months. That gain may seem unlikely, but stocks rallied 71% by year-end from the pandemic low set on March 23rd, 2020.

For sure, the “buy and hold” strategy in the current environment is not fun, but we have taken our clients 100% invested. If clients have extra cash, we will invest that cash today.

David Edwards is president and wealth advisor with Heron Wealth, a $500 million registered investment advisor based in New York City working with 225 client families across the U.S. and around the world. At the time of publication, Edwards and/or his clients held positions Amazon, Apple and Google.