Bitcoin's Tumble Was a Warning for Stock Swoon, Morgan Stanley Says

February 12, 2018

New York (Feb 12)  Esoteric exchange-traded products? Risk parity? Inflation fears?

Forget about all that. The genesis of the widespread correction in risk assets has its roots in flagging enthusiasm for Bitcoin, according to Morgan Stanley. The cryptocurrency is down more than 50 percent from its record high set on Dec. 18.

Chief U.S. Equity Strategist Michael Wilson outlined this claim in a note to clients on Monday explaining why they should be "disciplined" buyers of equities.

The S&P 500’s forward price-to-earnings ratio -- a closely-watched valuation gauge -- peaked on the same day the world’s largest cryptocurrency hit its all-time high. The U.S. tax overhaul bill proceeded to pass through the Senate the following session.

“We think the passage of tax cuts coincided with peak excitement, at least in terms of price/valuation and ‘speculation’ as represented by things like Bitcoin," writes Wilson.

"Bitcoin, which we believe started the entire risk asset correction back in December, bottomed on Tuesday right at its 200 day moving average -- a good sign," he writes.

Similarly, the S&P 500 Index bounced off its 200-day moving average on Friday, with the benchmark U.S. equity gauge proceeding to shoot into positive territory less than a half an hour later.

"We believe this vol shock/liquidity event has likely taken valuations too low at this point but realize such events have a way of overshooting to the downside which is why we have advocated patience in buying this dip," concludes Wilson.


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