On the Margin Newsletter: A notoriously rough month for markets is upcoming

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Welcome to the On the Margin Newsletter, brought to you today by Casey Wagner exclusively. Here’s what you’ll find in today’s edition:

• We’re heading into one of the more volatile months for equities. Here’s what to watch for.
• Bitcoin-based stablecoins may be the reality soon enough. Let’s unpack how.

We’re in Leo season, so buckle up

Happy birthday to our Leo readers!

As we approach the end of July, I’m starting to think about what is ahead for August, and I’m not talking about astrology. It’s a historically tough month for markets, and I have a feeling this year will be no different. (I’m also wondering how the summer flew by so quickly, but I digress.)

The S&P 500 and Nasdaq Composite indexes in August 2023 lost 1.6% and 2.1%, respectively. The year prior, the S&P 500 lost just under 1% and the Nasdaq Composite slid 4.6% during August.

This August is special — just like every other month of 2024 — because it’s an election year. Curiously, the CBOE Volatility Index (VIX) has historically peaked more often during the first half of the year in the past eight presidential election years.

Normally, by the third quarter of an election year, we have a better sense of how voters are feeling, or at the very least, who will be on the ballot. But nothing about 2024 has been normal.

Today, the VIX stands at approximately 17.3, having risen over 20% in the past five days. However, it remains below the key threshold of 20, which analysts suggest almost always signals increased volatility. So far this year, the VIX reached its peak in April at 19.2.

The next 30 days are fraught with uncertainty. Earnings season rages on, the FOMC is set to convene for a consequential policy-setting meeting and Democratic delegates will choose their presidential candidate.

It’s no wonder the VIX is climbing, but why is it still relatively low? My best guess is that no one wants to ruin a good thing. Stocks have performed exceptionally well this year, and there’s nothing investors like more than a stable environment. For that reason, I think they may be turning a blind eye to the uncertainty.

Markets are confident the Fed will cut rates this fall and that the Dems will select Vice President Kamala Harris as Biden’s replacement. For now, at least, that appears to be enough.

Another month stocks tend to hate is October, which will see the peak of presidential election speculation as campaigns make their last efforts to woo voters as early voting kicks off.

The S&P 500 and Nasdaq Composites lost 2.1% and 2.8%, respectively, in October 2023.

Still, as DataTrek Research co-founder Jessica Rabe pointed out, stocks more often than not peak during the final quarter of the year. In the past four-plus decades, the S&P 500 has posted its high during Q4.

But what about in years when stocks posted double-digit returns in the first half of the year?

“The S&P’s rally tends to slow in the back half after rising by double-digits in the first half, so the bulk of the index’s gains are likely already in for this year,” Rabe said. “That said, the S&P is only up 1.7% in 2H thus far versus the average of 6.7%, so history says there’s still gains to be had.”

And then, of course, there’s crypto. The wild-card asset class tends to keep us on our toes, but has generally adhered to the “August is a bad month” narrative for the past two years. Bitcoin and ether lost 11.3% and 10% in August 2023, respectively. In August 2022, BTC ended the month 14% lower while ETH dipped 8.5% during the 31-day period.

With regulatory headwinds and the expectation of new investment product launches (we’re looking at you, ether ETFs), crypto prices face other factors. However, we think the macro narrative is one to watch.

— Casey Wagner

$1.08 billion

This is the collective trading volume for ether ETFs on their first day of trading in the US. This is about a quarter of the volume that bitcoin spot ETFs brought in on their first day of trading in January.

The Grayscale Ethereum Trust saw the most volume, with $456 million worth of trades yesterday. Net inflows across all products came in at $106.7 million.

“Now day one is behind us, the market will continue to analyze the data to gauge underlying demand, while refocusing on upcoming catalysts such as Friday’s PCE data and Saturday’s Bitcoin conference where Trump is scheduled to speak,” analysts at Wintermute Trading wrote in a Wednesday note.

BTC stablecoins?

On Tuesday evening, Lightning Labs released Taproot Assets version 0.4.

This update allows the Bitcoin layer-2 Lightning Network to support assets other than bitcoin, paving the way for bitcoin-based stablecoins.

“With Taproot Assets, users can make instant, low fee asset transfers, bringing trillions of stablecoin volume to bitcoin,” Lightning Labs wrote in a post on X.

The news is exciting for bitcoin fans because it showcases a use case beyond an investment vehicle, Noelle Acheson, author of “Crypto is Macro Now” said.

“Lightning already connects to major exchanges (Coinbase, Binance and others), and it’s not a stretch to imagine new stablecoins forming the base of new trading pairs, especially of bitcoin-based tokens,” she said.

Stablecoins currently have a total market cap of more than $172 trillion. Why add more to an already crowded market? The Lightning Labs team says it’s less about market share and more about interoperability.

“While stablecoins do tend to have a network effect, including the dominance of USDT, the design of Taproot Assets also makes it easier to do cross-asset transfers, for example sending a USD stablecoin and receiving in BTC or sending between two different stablecoins,” CEO Elizabeth Stark said in an interview with Bitcoin Magazine.

You won’t find us launching any BTC stablecoins anytime soon, but it’s an area we are interested in watching.

— Casey Wagner

Bulletin Board

• Thanks to a recent market rebound, bitcoin miners are expected to return to profitability soon, according to a report from exchange Bitfinex.
• HSBC Australia said Wednesday that it will automatically block clients from making payments to crypto exchanges due to a recent increase in scams and hacks.
• One more shameless plug from Casey, our solo newsletter writer today: If you will be in Nashville at Bitcoin 2024, come say hi!

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