11/14/2024 Ross Mayfield Five for Friday

Five for Friday - November 22, 2024

Bitcoin, A.I., Rallies, Sentiment, and Loose Change

Bitcoin
Artificial intelligence
Back-to-back
Sentiment hot
Did you know?

1. Bitcoin

While many of the post-election market winners have since reversed, one that has clearly not is Bitcoin. Why? In my opinion, it is because it represents a cleaner story than any stock or sector trade. Because bitcoin does not have any inherent cash flows (earnings, dividends, interest, etc.) and is little used as a currency – only 1% of Americans bought something with bitcoin in 2023, down from 2021 and 2022 – it trades largely on sentiment, liquidity, and “adoption” potential. President-elect Trump’s win, as the clearly more crypto-friendly candidate (from promising a national bitcoin reserve to the pledging widespread deregulation efforts), sparked a bullish surge. Bitcoin has a finite supply, so when demand is higher – due to investor interest from election coverage and/or broader institutional adoption – the price almost necessarily rises. It’s supporters are also uniquely fervent, making sentiment/price swings far greater than a normal asset (along with the subsequent pile-on activity that supercharges most of its moves). Bitcoin’s (non-currency) value proposition is certainly unique – a digitally native, fungible, portable, divisible store of value divorced from centralized monetary or fiscal authorities – and it has retained relevance for over a decade. No small feat. But its lack of a tangible use-case and/or any associated cash flows, plus the non-zero chance that another digital asset could supplant it as crypto’s premier store of value, leaves me wanting for more. In the end, I can only say one thing with 100% certainty: FOMO is not an investing strategy. (Baird does not currently allow cryptocurrency investment products to be solicited or recommended. We will only accept client-directed trades of cryptocurrency-based investment products like ETFs. We do not custody cryptocurrency at Baird.)

2. Artificial intelligence

Entering 2025, a hinge point for the stock market is how investors feel about the progress of A.I. uptake (particularly given that 8 of the 9 largest U.S. companies are Tech firms with correlation to A.I.). Hundreds of billions have been spent on infrastructure to support broadscale proliferation of A.I. models, and my guess is that investors will soon want to see more tangible returns on that investment. To that end, the Federal Reserve Bank of St. Louis released the first nationally representative U.S. survey of generative AI adoption. The finding that almost 1 in 4 respondents said they use generative A.I. daily or at least once a week for work seems promising, particularly given that the A.I. adoption rate is running ahead of other major technologies in recent decades (e.g., PCs, internet). So far, so good, it would seem.

3. Back-to-back

After years of strong returns have left markets near all-time highs, a common investor concern might sound something like, “Well, this can’t last. Should I take some chips off the table?” That may be prudent for some investors, but I’d disagree with the broader premise. Over the last 75 years, the S&P 500 has returned 20%+ in a year 28 times. For those 28 years, the median return the next calendar year was 14%. Going a step further, 8 of those occasions saw back-to-back years of 20%+ gains. The median return in the third year? 13%. The market may do poorly next year, but strength in 2023 and 2024 is not reason alone to be bearish on 2025.

S&P 500 Total Return: A table showing that when the market had back-to-back years with a greater than 20% return, the median return for the third year was 13%

4. Sentiment hot

While this is a more tactical risk, it’s always worth scanning the horizon for headwinds to be better prepared for potential dips. In this case, investors are feeling great (the 12-month rolling average of bullish sentiment is at its highest since 2005) and voting with their dollars (per EPFR, U.S. equity funds saw their 2nd largest weekly inflow since 2008). Euphoria can breed complacency and lead to pullbacks when they’re least expected. Over the last 75 years, the S&P 500 has seen forty 10% corrections, with the most recent in Fall 2023. Have expectations, not forecasts.

5. Did you know?

The TSA collected ~$1 million in unclaimed money left behind at airport security in 2023. Miami Int’l Airport patrons were by far the biggest scattergoods, leaving $78,950 in loose change behind. Free money is free money, but at only 0.00002% of government revenue, it probably won’t make much of a dent in the national debt any time soon.

Disclosures
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Market and economic statistics, unless otherwise cited, are based on data from FactSet. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

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Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Baird does not currently recommend the purchase of any cryptocurrencies, products that attempt to track cryptocurrencies, or cryptocurrency custodians. Baird does not custody Bitcoin or any other cryptocurrencies.

Other Disclosures
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