by Hubert Marleau, Market Economist, Palos Management
From 4 p.m. on Sunday to Tuesday afternoon, the price of a bitcoin dropped 8% to $84,000 and then rebounded fully by Wednesday, without any explanation other than the media saying it was not surprising because cryptocurrencies were very chaotic. What we know is that cryptocurrencies trade 24 hours a day, worldwide, making them more tradable than other assets, but also somewhat crash-proof, because when they dive, the likelihood buyers somewhere around the world will dip in is high, seeing the drop as a buying opportunity. We witnessed this speculative activity this week.
It is hard to figure out what the short-term prospect for Bitcoin is because there is no scientific way to value a highly volatile speculative asset that generates no income. In this regard, traders use technical analysis to make predictions. At the moment, it’s technically weak. Personally, I find this neither comforting nor rewarding because its price movements are way too abrupt and large. Fortunately, there is a method known as “comparative analysis” that could be helpful for speculators who are willing to take a long-term approach.
Because Bitcoin is widely called “digital gold” and gold as “physical bitcoin,” there appears to be a connection between the two, as they are both fueled by the US dollar debasement thesis, the real cost of money, and governments that seek geopolitical power and independence. The first observation is that over the years the price of a bitcoin trades between 25 and 35 times that of a troy ounce of gold. The fraction is currently around 22.0 times. The second is that gold tends to be inversely correlated with the S&P 500 on a cyclical basis, but trends perfectly on a long-term basis. Given that the S&P 500 is generally expected to reach 10,000 points by 2029, the world of market strategists is also targeting a gold price of $10,000. Assuming that the relationship between bitcoin and gold is maintained for the period under consideration, my forecast range for bitcoin is therefore $250,000 to $350,000 for the comparable period. (Incidentally, ARK’s CEO Cathie Wood is forecasting that bitcoin will be worth $1.2 million per coin by the end of 2029.)
What Happened in the Week Ended December 5?
On Sunday, US stock futures were little changed, as investors, in light of a volatile November, only hoped to end the year on a positive note.
On Monday, the S&P 500 started the month of December on the back foot, falling 0.5% to close at 6819, even though Bank of America had changed its mind that the Fed will likely decrease interest rates this month. More importantly, the Bank of Japan rattled the global bond markets with harsh comments that it may raise its policy rate in December, amid a renewed sell-off in cryptocurrencies.
On Tuesday, the S&P 500 registered a moderate rebound of 0.25% to end the session at 6829, as dippers dialled back risk and crypto traders rallied, en masse, to cryptocurrencies.
On Wednesday, US stock futures signalled during the early hours that investors should expect a second day of modest gains as traders were wagering that the economic data due during the session would reinforce expectations for an interest rate cut this month. Indeed, it screamed ‘cuts’. The latest ADP report confirmed that a broad hiring freeze was in place, while private-sector payrolls had decreased by 32,000 in November, adding concerns about a more pronounced weakening in the labour market. By the end of the day the S&P 500 was up 0.3%, closing at 6850. Incidentally, Bitcoin also extended its rebound, in part because Vanguard Group decided to permit ETFs and mutual funds that hold crypto assets to be traded on its platform.
On Thursday, U.S. stock futures held their gains as traders geared up for a widely anticipated year-end rally. After weaving in and out of negative territory all day, the S&P 500 managed to edge higher by 0.1% to 6857.
On Friday, absent from a shock, US stock futures indicated in the a.m. that the S&P 500 was on track toward a new all-time high, as investors awaited the BEA to release crucial new data on inflation and consumption as a “gut check” of vibes on the economy. Inflation didn’t get any worse in September, staying close to an annual rate of 3.0%. The S&P 500 rose 0.2% to finish the day at 6870.
The Near-Term Stock Market Outlook
Last week I wrote: “As the new year approaches, top-down Wall Street strategists have started to incorporate their economic, monetary, financial and fiscal assumptions for 2026 in their stock market predictions for the year ahead."
“The strategy team at Deutsche Bank boldly predicts that strong corporate earnings and AI-driven growth will project the S&P 500 to 8000 by the end of 2026, making it the most bullish prediction on Wall Street; while JPMorgan Chase strategists, meanwhile, dropped their cautious view on US equities, joining the ranks of Wall Street firms forecasting a rally next year. They now see the S&P 500 Index rising 11% from its current level to 7500 points by the end of 2026."
“The Bank of America warns of a more cautious year ahead, owing to an affordability squeeze, stressed valuations and possible speed bumps in the AI sector. It has a forecast of 7100 for 2026, even though earnings are expected to increase by mid-double digits, because multiples could compress as much as 10% and drain liquidity.”
The Financial Times had an interesting article this week on what Wall Street banks expect US stocks will do in 2026. According to the average forecast of nine major investment banks it surveyed, the blue-chip S&P 500 index will rise to more than 7500 points by the end of 2026 with Deutsche Bank being the highest at 8000 and Bank of America the lowest at 7100, defying investor jitters over big tech hyperscalers’ huge spending plans and potential bubble in the AI sector.
Speaking of the compression thesis, there is consensus that the P/E differentiation between tech and non-tech stocks will narrow in 2026. There is, however, a lot of confusion on how this expected narrowing of multiples will take form. In my judgment, the narrowing process will depend on whether the anticipated productivity from the application of AI will broaden across all sectors of the economy. Should the latter come about, as I expect, the narrowing process would result from higher non-tech valuations.
With the help of Gartner, a famous data company that maps the hype cycle of different technologies, and Minecast, a global cyber security company, the WSJ acknowledged that with the right preparation and sensible deployment, generative AI can be an impressive productivity too, in spite of tendencies at times to hallucinate and even confabulate facts. In fact, on earnings calls, corporate officers have extolled the possibilities of deploying AI across almost every business function to improve efficiencies. Alpine Macro has revealed that companies who are using AI are enjoying a “jobless profit boom”. It is perhaps the reason why productivity growth is now more than twice as fast as it was in the 2020s.
Copyright @ Palos Management
