No one can actually look into a crystal ball, so it shouldn’t surprise anyone that competing economic and corporate headlines have created an unclear picture of the U.S. economy. In this month’s post, we dig into the mixed messages to better understand why everyone is confused about what’s next. Even the most experienced investors among us are digesting the news carefully and planning for some level of uncertainty. We also shine some light on possible opportunity in the bond market and what investors need to understand about the brand-new Bitcoin ETFs. Keep reading to see if either opportunity might be right for you.
Bonds have rallied, but still haven’t recovered lost ground
Since the end of October, when the U.S. Treasury announced that it would focus its refunding efforts on short maturities, global bonds have been on a tear. While the rally has cooled over the last month, most major indices are up anywhere from the mid-to-high single digits on a total return basis since then. The question Frank Talbot of Citywire asked last month was simple, given the significant bounce that bond markets and investors in them have experienced, have investors who’ve been on the sidelines missed out?
The conclusion Mr. Talbot reached is, generally, no. Of all the slices of the global bond market Mr. Talbot evaluates, only U.S. high yield corporate bonds had surpassed their prior peak on a total return basis. Domestic municipal bonds weren’t far off. Global inflation-linked bonds and developed market sovereign debt had the furthest to go, with roughly 1/5 of the distance from their trough to their prior peak yet to make up. Although the author notes that the previous highs may have been boosted by extraordinarily loose monetary policy, moderating inflation has led many market participants to forecast a drop in yields in the medium term.
In the month since Mr. Talbot’s analysis concluded, economic optimism has buoyed developed market yields. Consequently, only global and U.S. high yield corporate bonds have eked out marginally positive returns, while every other market segment has given up ground.1 With major equity indices notching new records, this still leaves most of the global fixed income market roughly as cheap or cheaper versus stocks and its own past valuations than it was a month ago.
Conflicting headlines drive an unclear economic picture
Competing economic and corporate headlines have created an unclear picture of the U.S. economy. There have been several headlines claiming the robustness of the economy, and by many measures that is true. GDP growth increased 3.3% during the fourth quarter and while that was less than the 4.9% growth rate from July through September, the growth from 2023 continues to deliver better results than expected. Measures from inflation to labor data have also impressed economists, many of whom predicted a long-awaited recession that has not arrived. Equity markets have also delivered strong gains—the S&P 500 Index reached all-time highs during January, again signaling the strength in the economy.
Despite the rosy picture in much of the economic data, there have been conflicting reports around the labor market that both confirm the strength of the economy but also question it. Some of the largest companies including Amazon (AMZN), Microsoft (MSFT), Citigroup (C), Xerox (XRX), Alphabet (GOOG), and BlackRock (BLK) have begun workforce reductions or announced their intentions to do so, despite strong performance and near record highs for several of these companies’ stocks. Citigroup alone stated their intention to cut their workforce by about 20,000 jobs through 2026, which could result in nearly $2.5 billion in savings. One common thread between these announcements has been efficiency, as companies are trying to right-size and do more with less. In the past, announcing layoffs has meant slowing growth for companies, especially within the information technology space. However, in today’s market, executives are seeing these announcements rewarded. For example, Meta Platforms (META) cut 20,000 jobs in 2023, and saw its stock price surge 194% in 2023, bouncing back in a large way from a terrible 2022.2, 3, 4
Even with the headline news around white-collar layoffs, the January Employment Situation Report from the Bureau of Labor Statistics showed that 353,000 jobs were added for the month. The report also had upward revisions to the numbers from November and December. The positive revisions were welcomed, but the numbers from January were above expectations and much higher than the 255,000 monthly average gains in 2023.5
The conflicting headlines between economic data and corporate jobs cuts have created confusion and shown a disconnect between how people are feeling and the actual numbers. Although inflation has peaked from 40-year highs during the summer of 2022, prices are still high despite the current 3% increase nearing the Fed’s target of 2%. For investors and consumers, the mixed messaging has created a tough landscape to navigate.
Spot Bitcoin ETF
January 10th marked a momentous day for the digital asset space, as the SEC finally approved 11 spot bitcoin ETF applications. The big news comes after a decade long history of repeated rejections of all previous ETF filings. With a 3 to 2 vote by SEC commissioners, Chairman Gensler giving the deciding vote, many ask what changed that caused the SEC to approve this latest batch of ETF applications. Some of the credit is due to larger financial institutions like BlackRock, Invesco, and Franklin Templeton entering the race, but still many suspect that the SEC’s decision was forced by recent court rulings in the Grayscale’s case against the SEC, where the judge found that the SEC previous rejection of Grayscale’s ETF application was “arbitrary and capricious,” forcing the SEC to reexamine their decision. At any rate, many digital asset participants are celebrating this win and view the approval as an acceptance by traditional financial institutions and a legitimization by government regulators.6
On the first day of trading, the ETFs saw considerable transactions with more than $4.6 billion of volume across all bitcoin spot ETFs, and since then the new ETFs have continued to gather assets with the offerings from BlackRock and Fidelity leading the way. It is important to note that asset growth has not been entirely organic, as a large majority of flows into the “newborn nine” have come from Grayscale’s GBTC converted Bitcoin Trust ETF, as investors move assets to the new lower cost options. Despite this cannibalization amongst the offerings, we are seeing steady positive overall flows into the ETFs. In fact, BlackRock’s iShares Bitcoin Trust (IBIT) now ranks in the top five of all ETF for year-to-date flows.7, 8, 9, 10
Now that a regulated and approved spot bitcoin product is on the market, investors may need to reconcile previous decisions to avoid bitcoin due to lack of access. In such a case, investors would do well to look through the excitement and hype of the ETF launches and consider the question, “is there a role for bitcoin in my portfolio?” In addressing such a question, it would be wise to examine the specific risks, goals, and loss tolerance in conjunction with such a product, and a discussion which should be had with an experience advisor.
Regardless of each individual participant’s decision, there is a growing overall trend of acceptance of bitcoin, as is demonstrated by launch of the new bitcoin spot ETFs. What impact these ETFs have on the existing financial industry or the newer digital assets space, remains to been seen, but based on bitcoins past, it is likely to be an exciting journey.
Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. For more information on Envestnet | PMC, please visit www.investpmc.com.
