That the market did so well in 2017 doesn’t guarantee that 2018 will be a repeat of the conditions that afforded such strong performance. Circumstances change and events intervene. Therefore, as we turn the page to 2018, investors must maintain realistic expectations and remain vigilant for developments that may impact the markets in the months and quarters ahead.
The Future(s) Of Bitcoin
And then there was Bitcoin—a cryptocurrency, “mined” by prospectors using high-powered computers to solve increasingly complex mathematical equations. Those who dared to criticize the legitimacy of bitcoin, or cryptocurrencies in general, were deemed latter-day Luddites, who weren’t smart enough to embrace not just the trend, but the future itself.
Bitcoin futures have begun trading as we enter the new year, and a number of exchanges are planning to provide trading platforms. Traders will be able to leverage their bets, adding to concerns that the bitcoin market could become a material source of volatility.
The Futures Industry Association, a global organization of commodities brokers, has publicly questioned whether there’s been enough consideration regarding the volatility associated with the cryptocurrency market. In addition, there are concerns regarding overall risk, stress testing and limits on trading the currencies. According to a spokeswoman for the organization, “The industry doesn’t feel that it necessarily had the opportunity to discuss the potential impact and that the proper safeguards have been put in place before the launch of the instruments. We’re agnostic about the product. It really is the process we’re focused on here.”
As with bitcoin or any other asset that moves dramatically higher, investors worry about the inevitable fall. With the ability now for traders to short bitcoin, coupled with the leverage that can be incorporated in trading, any volatility can be magnified. As with any potential volatility, market participants always fear collateral damage caused by a pullback.
Meanwhile, bitcoin millionaires—indeed billionaires—scoff at any concerns. They view bitcoin from a more fundamental perspective, explaining that it, along with the burgeoning asset class of cryptocurrencies, is a distinctly non-correlated asset class that provides the “alpha” that’s needed for portfolios. To invoke a term emblematic of the dot-com era, this is to bitcoin adherents the “new paradigm.”
The U.S. Economic Backdrop
One of the most important changes during 2017 was the series of positive economic surprises, both in the U.S. and internationally. The Citigroup U.S. Economic Surprise Index, a barometer of how economic data releases have missed or beat consensus estimates, is almost at its highest level since the beginning of 2014.
The U.S. economy saw growth climb into the 3 percent range during the second and third quarters, and expectations are that the fourth quarter of 2017 will also have a gross domestic product above 3 percent. The first quarter of 2018 should also enjoy stronger growth as capital spending by companies continues to expand, and as global growth, coupled with a still competitive U.S. dollar, supports U.S. exports.