Investing Insights

WARS AND UNEMPLOYMENT  •  April 15, 2024  •  Jon Wolfenbarger

Wars And Job Cuts Raise Risks For Bitcoin And Stock ETFs

DENVER, CO — The big decline in Bitcoin over the weekend following the latest violence in the Middle East should serve as a wakeup call for investors who think there is no risk in the market these days. 

To the contrary, as we have discussed in our articles, Q&As, webinars and media appearances, we believe risk of a major stock market decline has rarely been higher due to 1) valuations near the highest levels in history, 2) virtually all leading economic indicators pointing to recession this year, 3) extremely bullish investor sentiment and 4) bearish market breadth and internals such as advance-decline lines and new highs less new lows.

Bitcoin historically has been highly correlated with stocks, particularly the NASDAQ and tech stocks. It also has tended to lead stocks in both uptrends and downtrends. Bitcoin has essentially traded like a highly speculative tech stock, which is not surprising, given its limited history, lack of earnings and reliance on high technology.

The weekly chart below shows Bitcoin has recently broken below its recent uptrend line on both price (top clip) and On Balance Volume (second clip). The Weekly PPO indicator (third clip) shows price momentum is close to turning negative. Weekly RSI (fourth clip) shows Bitcoin has been very overbought recently. All of this suggests Bitcoin could soon embark on another major decline, which would likely be followed by stocks, if history is any guide.

A Bigger Wake Up Call

A much bigger wake up call from the weekend for everyone in world is this: why do we allow — and often encourage — politicians to wage war and kill innocent people, including women and children who have nothing to do with politics or the military?

For example, slavery used to be acceptable in civilized countries, including the USA, UK and virtually everywhere else. Fortunately, more than a century ago, human beings finally advanced enough morally to no longer consider slavery as acceptable for civilized people.

So why do we still consider war, the most murderous and destructive practice humans are capable of, to be acceptable for civilized people? It’s 2024. Why isn’t war outlawed by now?

Humans will always have disagreements and conflicts, particularly when religion and politics is involved. But that does not mean disagreements and conflicts cannot be solved peacefully and diplomatically. We all have disagreements and conflicts with people in our daily lives. But we are not allowed to shoot them or bomb their houses. Why do we allow politicians to use our hard-earned tax money to shoot, bomb and kill people?

It’s long past time for humans to move on to a more peaceful, prosperous and happy world free of the horrors of war.

Speaking Of Moving On…How Is The Economy Doing?

Now that I got that off my chest, let’s return to the economic outlook that investors should be focused on, but most are not. 

The NFIB Small Business Optimism Index, which measures the economic outlook of small business owners, has fallen to the levels seen in the early months of the Great Recession of 2008-2009. It is even lower than the levels seen during the covid panic and lockdowns of 2020, as shown below. This is not a bullish sign.

Source: NFIB

Similarly, as shown here, the NFIB Small Business Earnings Index has fallen to levels seen in the early months of the Great Recession and during the covid panic and lockdowns of 2020.

Source: NFIB

The NFIB Small Business Hiring Plans Index leads the unemployment rate by about six months. In March it fell to 11, which is the lowest level since the covid lockdowns and similar to levels seen in the early months of the Great Recession.

Source: NFIB

The latest NFIB survey also showed that “poor sales as biggest problem” has been rising steadily in recent months. Since this measure (orange line) historically leads the unemployment rate (blue line) by about three months, as this chart shows, this is another sign that the unemployment rate is likely to rise going forward.

Source: Trahan Macro Research

Another indication of weakening employment is the fact that both the ISM Manufacturing and Services employment indexes have been in contraction (below the neutral 50 level) for several months, which is similar to where they were in the early months of the Great Recession.

Source: ISM and Bloomberg

Thus, it should be no surprise that a recent NY Fed consumer survey shows that consumers currently believe the probability of losing their job is at the highest levels since the covid lockdowns, as shown here.

Source: The Daily Shot

As proof that this is happening in the real world and not just in surveys, March job cuts were the highest in more than a year, as discussed in this article:

“Employers in the U.S. announced 90,309 job cuts in March — a 7% increase from February, according to data released Thursday from executive coaching firm Challenger, Gray & Christmas. That amount of planned layoffs mark the highest monthly total since January 2023, when employers announced 102,943 cuts. Companies are cutting jobs as a result of store closures, bankruptcies, organizational restructuring or general cost-cutting, Challenger said. The cuts suggest that "many companies appear to be reverting to a 'do more with less' approach," Senior Vice President Andy Challenger said in a statement.”

Median Stock Is Still Down and Volatility Is Rising

The median stock, as represented by the Value Line Geometric Index, is still down over 15% from its late 2021 highs. As the chart below shows, the median stock (top clip) has not ended the bear market downtrend it has been in for more than two years. 

The Volatility Index (VIX; second clip) tends to move in the opposite direction of stock prices. The VIX falls when investors become more greedy and risk-seeking and rises when investors become more fearful and risk-averse. The VIX has risen nearly 40% in the past few weeks and has broken above the downtrend line which has been in place for about 18 months. This shows investors are becoming more fearful, which is causing the to sell stocks.

Investment Implications

With wars continuing in Russia and the Middle East, which could ultimately involve nuclear weapons, as well as increasing job cuts, it is no surprise that volatility and investor fear is rising and Bitcoin and stocks are starting to weaken. Unfortunately, this could get a lot worse before it gets better.