This past week was quite remarkable, with the price of the S&P 500 index falling more than 3.5% in just one week. This might not seem like a lot for crypto investors, but for stock market investors, it’s huge, especially in such a short period of time. But what caused this ? Let’s dive in
General Crash
This crash has impacted not only the crypto market but also the stock market, with the NASDAQ, for example, dropping by more than 1,000 points :
The good news is that Bitcoin only took an -8% hit during this period. Usually, it can fall much lower, considering Bitcoin is still a high-risk asset with a historical correlation to the NASDAQ, which is a tech-heavy index. This is due to a wide range of factors I mentioned in my last article (US Presidential elections, Nvidia FUD, etc.), but today I want to focus on the biggest concern: the fear of an economic recession.
The Recession
“Recession” is a word that has been overused in recent months — in presidential speeches, on Twitter, and it’s on the minds of many investors. But what is a recession ? It’s a decline in economic growth, which can be caused by inflation, poor interest rate policies, and more.
To gauge the health of an economy, we look at statistics like unemployment rates, inflation, job creation, etc. This is what the Federal Reserve monitors before making decisions on interest rates.
Currently, US inflation numbers are quite encouraging, with inflation at 2.9% and expected to drop to 2.6% this month. However, the true inflation indicator, which uses real-time data, shows inflation at 1.25% :
Meanwhile, the employment rate is rising but remains under control
bls.gov
But Why Are Investors Panicking ?
Yield Curve
One of the indicators highly correlated with a recession is the yield curve inversion spread between the 10-year US bond and the 2-year US bond.
In the graph, you can see the yield of the 10-year US bond in blue, and the yield of the 2-year US bond in red. Under normal circumstances, 10-year bonds have a higher yield than 2-year bonds because there’s more uncertainty over a 10-year period. However, when that’s not the case (orange curve), it indicates that investors are pessimistic in the short term.
The interesting thing is that when the yield curve returns to the usual ratio (green curve), a recession is often near :
Source : FRED
As you can see, the same graphic shows grey zones representing US recessions. Investors are worried that we might be heading toward another one soon.
Personally, I don’t believe this will happen because US economic statistics are strong, but at the end of the day, market sentiment drives the market, so we’ll have to wait and see.
As always thank you for reading !
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Disclaimer : This is not a financial advice, you need to do your own research !
The Truth Behind the Stock and Crypto Market Crash was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.