Level Setting Expectations

Level Setting Expectations

My 2024 Bitcoin price prediction was incorrect. I had targeted $120k, based on expectations of increased demand for the ETF, inflation, and higher allocations from financial advisors. BTC only made it to $108k in 2024. Most market observers write an overview of what they expect in the following year at the end of December or first week of January. I decided to wait until I had the opportunity to fully observe changes in the bond market, which stunted Bitcoin’s price along with most other risk assets.

Bitcoin hit an all-time high of $108k on December 17th. After this, there was an expectation of a Santa Claus rally, along with a run up into Trump’s inauguration. He is the first Bitcoin-supporting US President after all (Trump ’47, not Trump ’45 – that president hated Bitcoin). Here is why the rally was killed:

On December 3rd, the yield curve went from inverted to flat. Many people point to an inverted curve as a predecessor to recession, but actually, when and how a curve un-inverts is a telling harbinger. In this case, the Fed lowered short-term rates to help prevent a recession, while long-term rates rose as markets began to price in higher future risks. Higher bond yields actually drive investors away from risk assets and into a higher yielding safe haven. Within fixed income, investors will move from junk bonds to higher credit-rated bonds. This will drive risk spreads wider and yields higher.

At higher yields, lower-rated companies will have to spend more in debt service to issue debt. Those higher financing costs cause defaults to ratchet up. High Yield bonds have a high correlation to the S&P. While I do not expect a recession in 2025 or a negative year for stocks, I anticipate a lower rate of return for the S&P in 2025, around 8-12%, compared to previous years returns above 20%.

Real Estate across the board has been in a difficult position as well. Commercial properties have low occupancy rates, while building owners are selling below the principal value of outstanding debt. Residential has been suffering from both lack of disposal income and movements between homes, and of course high mortgage rates. Mortgage rates moving from 3% to 6% already doubled the cost of annual interest in a home, making them pricier. There has been hope that Fed rate cuts would reduce mortgage rates so builders could begin to offload pent up inventory. However, mortgage rates are tethered to 10 year UST rather than short end rates, so a higher 10 year drives rates up, while the spread will likely continue to widen. I expect residential real estate in most markets to continue to soften in 2025, as well as into 2026.