The stock market was down last week, and investors are worried a crash could be imminent. Additionally, the treasury yield curve inverted for the first time in a decade. With both the stock and bond markets taking a hit, investors are looking to crypto as a potential safe haven. But, they are concerned about crypto’s volatility and what it can mean for their portfolio.
The stock market and its included companies have both a short-term and a long-term moving average. The moving average is the price of a stock over a certain period of time. When the short-term moving average is lower than the long-term moving average, some analysts believe the market could turn downward.
This technical pattern is known as a “death cross” and can signal the start to a bear market. The S&P 500 was down 2.3 percent when it closed on Friday. The dip pushes the 50-day moving average below the 200-day moving average.
For traders, a death cross can signal a major sell-off is imminent.
Treasury Yield Curve Invert
A treasury yield is the total amount of money you can earn when you own U.S. Treasury bills, or bonds. The US Department of Treasury releases daily treasury yield curve rates on their website. The Dept of the Treasury states, “This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. ”
The treasury yield curve is based on the spread between short-dated and long-dated yields. A normal yield curve will have the long-dated yields as higher than the shorter-term yields. That’s because investors will generally expect a higher return if their money is illiquid for longer.
However, when the curve inverts, some economists predict that can bring a recession. When a yield curve inverts, the shorter-term bonds are higher than the longer-term bonds. This signals the investors have less confidence in what can happen in the short term. So they expect a higher return on the shorter duration bonds than they would on the longer duration bonds. It’s uncommon in a healthy economy which is why some economists see it as a doom and gloom indicator.
In fact, the treasury yield curve inverted on December 3, 2018 for the first time in more than a decade. Some economists predict the treasury yield curve inversion could spell a coming crash of 15% or more in Wall Street.
Is Crypto Really Uncorrelated?
For some investors, having a diversified portfolio of uncorrelated assets can help to lessen their risk exposure. Asset correlation relates to how one investment affects the movement of another. If a set of assets move together, in the same direction, at the same time, they are considered correlated. In contrast, if one asset class moves up or down and another is unaffected, they are generally thought to be uncorrelated.
In fact, in his Nobel Prize winning essay, Harry Markowitz, the creator of Modern Portfolio Theory hypothesized that in order “to reduce risk, it is necessary to avoid a portfolio whose securities are all highly correlated with each other.”
International bonds are an example of an uncorrelated asset to US treasury bonds. That’s because a country-specific bond might not be affected at all, even if the US treasury bond yields move up or down.
Similarly, cryptocurrency is often considered an uncorrelated asset.
Bitcoin is the most popular cryptocurrency. It’s also the newest uncorrelated asset available to retail investors. While the price of bitcoin is certainly volatile, it moves up and down without respect to stock and bond market movements. While stock prices may be down, crypto prices aren’t necessarily moving along with Wall Street.
Steps to Consider
The most prudent step to take in building your portfolio is diversification. Include a variety of investments in different asset classes to spread our your risk. And remember, mutual funds and stocks are not enough diversification. Both of those investments belong to the stock market asset class. Instead, consider adding real assets to your portfolio, such as gold & silver, or real estate.
Finally, consider adding some digital assets to your portfolio as well. As crypto is an uncorrelated asset, it can help to bring greater diversification to your portfolio make-up.