Red flags are emerging in the stock market. The obvious risks are hotter inflation and rising interest rates, but it’s also true that valuations are stretched.
Extreme bouts of volatility indicate a skittishness that could quickly turn to rampant fear. For me, one of the biggest red flags is the emergence of fad investing. Neophyte investors are plowing into investment crazes that evoke Dutch tulip mania circa 1630.
The rapid rise of the cryptocurrency Dogecoin (DOGE) is particularly alarming. First, let’s see what’s driving markets.
On Wednesday, investors were cheered by the continuing spate of solid corporate earnings reports, lifting the major U.S. indices as follows: the Dow Jones Industrial Average +305.28 (+0.86%); the S&P 500 +65.64 (+1.45%); the NASDAQ +295.92 (+2.08%); and the Russell 2000 +38.13 (+1.86%).
Read This Story: Straight Talk About Inflation
On Thursday, the U.S. Bureau of Labor Statistics reported that inflation, as measured by the consumer price index (CPI) for all urban consumers in the U.S., pushed higher in January, rising 7.5% from a year earlier, the largest 12-month increase since February 1982. That number is hotter than the consensus estimate of 7.3% (see chart).
Source: Bloomberg
It’s interesting to note that the prices for both new and used cars moderated sharply relative to prior months. Despite this, core CPI inflation (minus volatile food and energy) firmed more than consensus expectations, rising 0.6% over the month.
In pre-market futures contracts following the release of the latest CPI numbers, the main U.S. stock market indices were trading mixed.
Some cryptocurrency acolytes argue that crypto coins are an inflation hedge, because only a limited number of them can be “mined,” whereas the number of U.S. dollars typically increases over time. Ergo, if the supply of greenbacks increases, crypto coin value should also increase. However, there has been no historical evidence of this dynamic playing out.
We need to examine crypto as a risk asset, not as a hedge. Among the riskiest cryptocurrencies is Dogecoin.
A dog, with fleas…
Dogecoin was launched in 2013, as a lighthearted alternative to Bitcoin (BTC) and other coins. Doge is Japanese slang for “dog.” Dogecoin tokens feature the image of a Shiba Inu dog, an Internet meme.
Dogecoin has no mainstream commercial applications. It’s used for tipping online. Interest in Dogecoin grew through social media. Over the past 12 months, the value of Dogecoin has more than doubled and its market cap currently hovers at $21 billion.
Let that sink in. An asset that produces nothing and which started as a joke is now worth $21 billion.
Watch This Video: Musk, Dogecoin, and Other Tales From The Crypt
Dogecoin’s adherents, among them Tesla (NSDQ: TSLA) CEO Elon Musk, argue that the coin’s algorithm expedites a transaction process that’s more convenient than Bitcoin’s. Dogecoin takes only 1 minute to confirm, whereas Bitcoin takes 10 minutes. No one has been able to convincingly explain to me why that shorter time frame is a big deal.
But there’s an even larger issue at work right now with assets such as Dogecoin: fear of missing out (FOMO), a motivation that rarely ends well.
I’m reminded of the words of Bernard Baruch, financial advisor to President Franklin Roosevelt, who described the atmosphere immediately before the stock market crash of 1929:
“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”
Do we face a stock market crash in 2022? Probably not. Underlying fundamentals remain sound, rising inflation notwithstanding.
Also, I hasten to add that the technology behind cryptocurrency is worthy of consideration for investment. I’ve written extensively in previous articles about the “blockchain,” the computing infrastructure behind Bitcoin and the proliferation of alt-coins.
Read This Story: The Coolest Tech Trend You Never Heard Of
To be sure, the emergence of fad investing often signals a market top, but I remain generally bullish for 2022. The economy is growing, corporate earnings have been coming in strong, and I expect inflation to moderate in the second half of the calendar year. But you need to be highly selective. Stick to proven investment methodologies.
That’s where my colleague Jim Fink comes in.
Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink’s Inner Circle.
Jim has agreed to show 150 smart investors how his time-proven trading system can reap big gains, in up or down markets. We’ve put together a new presentation to explain how it works. Click here to watch.
John Persinos is the editorial director of Investing Daily.
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