Bitcoin’s a Pretty Good Guide to Animal Spirits in Stocks



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Bitcoin may not cut it as a currency in Mark Carney’s eyes, but it has at least one other use: it’s a pretty good measure of animal spirits.

There’s a remarkable similarity in chart movements of the digital token and the forward price to earnings ratio of stocks in the S&P 500 Index. The valuation measure peaked on the very same day as the cryptocurrency back in December, and hit a low days after Bitcoin bottomed out.

“The price of Bitcoin is worth watching,” Morgan Stanley analysts including Michael Wilson wrote in a report Monday. “While we do not expect this relationship to continue to hold so tightly we do think it will be hard for price-to-earnings to move significantly higher or lower without a commensurate move in the digital currency.”

Morgan Stanley notes that Bitcoin has been leading the way, making it a useful indicator. It bounced off its 200-day moving average (according to Bloomberg generic pricing) just a week before the S&P did on Monday. And the correlation between the earnings ratio and cryptocurrency has nudged higher after turning positive in the middle of last year.

Bitcoin plunged more than 40 percent this year and trades at $8,063, while the valuation gauge is at the lowest in almost two years.

— With assistance by Lucy Meakin


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