The S&P 500 has seen its price fluctuations outpace those of Bitcoin, sparking questions about the resilience of assets influenced by politics and human error.
Investors are shifting their attention away from U.S. assets, leading to a surge in Treasury yields and a decline in the dollar index and U.S. stocks.
Since President Donald Trump‘s aggressive trade policies were announced, the seven-day realized volatility of the S&P 500 has skyrocketed to 169%, its highest level since the coronavirus crash in 2020. In contrast, Bitcoin‘s seven-day realized volatility has doubled to 83% but still lags behind the S&P 500.
The S&P 500, also known as the 'Standard & Poor's 500' , is a stock market index that represents the market value of 500 large-cap companies in the United States.
It is widely considered to be one of the best indicators of US economic performance.
The S&P 500 is weighted by market capitalization, meaning that larger companies have more influence on the index's performance.
The index is rebalanced quarterly to ensure that it remains representative of the US stock market.
A Shift in Investor Sentiment
The dramatic spike in S&P 500 volatility surpasses that of Bitcoin, which is currently seeing a decline in volatility. This raises questions about whether investors should trust assets that are highly susceptible to political influence and human error or a mathematical framework and emerging store of value that is more resilient.
Investor Risk Aversion Leads to Market Shift
The S&P 500 has cracked 14% in less than two months, largely due to trade war fears that have recently come true. The tech-heavy ‘Nasdaq‘ and Dow Jones Industrial Average have suffered similar losses alongside increased volatility in global equity markets. As a result, investors are parking their money in Treasury notes, which underpin the global financial system, and the U.S. dollar, the global reserve currency.
A trade war occurs when countries impose tariffs or other trade barriers on each other's goods and services.
This can lead to retaliatory measures, escalating the conflict.
The goal of a trade war is often to protect domestic industries by making foreign imports more expensive.
However, this can have unintended consequences, such as higher prices for consumers and reduced economic growth.
Trade wars are typically settled through negotiations or agreements that reduce or eliminate tariffs.
Treasury Yields Surge and Dollar Index Falls
Since last Friday, investors have aggressively dumped Treasury notes, driving yields higher, and the dollar index has tanked. The so-called benchmark 10-year bond yield has surged by 62 basis points to 4.45%, while the dollar index has extended its first quarter swoon to 100, its lowest level since late September.
The U.S. dollar is the official currency of the United States, first introduced in 1792 as a bimetallic standard.
It replaced the Spanish dollar and other foreign currencies in circulation at that time.
The gold standard was adopted in 1879, where one troy ounce of gold was equivalent to $20.67.
The Great Depression led to its abandonment in 1933.
Today, the U.S. dollar is a fiat currency, backed by the full faith and credit of the U.S. government.
A Rare Event: Yields Higher, Currency Lower
Currencies typically appreciate when their national bond yields rise unless markets are worried about the country’s debt situation. However, this is a rare event for the U.S., with only four episodes in the last 30 years where the dollar depreciated more than 1.5% with the 30-year yield up more than 10 basis points.
A Reflection of Evolving Market Sentiment
The current market shift reflects ‘evaporating U.S. growth exceptionalism and reduced attraction at the margin of dollar assets for reserve purposes amid erratic US decision-making’ , according to Evercore ISI.
