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Inflation remains the central focus of policymakers and investors. Price pressures have continued to broaden out as the economy has matured since its reopening. At the onset of the reopening, price increases were concentrated in areas such as autos and hotels, but they have expanded into energy, food, and wages—confounding some investors and policy officials who once believed increases would be transitory.

• Wages have accelerated faster for lower-income workers
• Real measure of stocks suggests an overvalued market
• “Dumb Money” confidence has surged

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Market participants had been expecting that the past couple of weeks would reveal surging inflation, putting a crimp on corporate profit margins and enough pressure on policymakers of the world’s major central banks to prompt them to begin to unwind pandemic-era policies. But the barking dog of inflation failed to take much of a bite, leaving stocks to continue the almost daily string of new all-time highs seen in the MSCI World Index.

Despite inflation pushing up costs, corporate profit margins hit multi-year highs for U.S. and international companies in the third quarter, according to earnings reports. While a wide range of costs (materials, energy, transportation, labor, etc.) are up, companies have been largely successful at passing those costs on to customers. Stocks have continued to move higher during the earnings reporting season, as results widely exceeded estimates.

• Despite rising costs, profit margins are at multi-year highs
• G20 policy rates on slow trajectory

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Bond yields have fallen sharply in the past few weeks, despite the Federal Reserve’s tapering announcement, rising inflation, and ongoing strong economic data. Ten-year Treasury yields (which move inversely to bond prices) are back below 1.5%, a significant drop from the 1.7% high seen in mid-October.

• 10-year Treasury bond yields have fallen
• Higher real interest rates
• Real yields are at historically low levels
• More volatility

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Cryptocurrencies have exploded in popularity over the past few years, despite (or because of) their extraordinary price volatility. Last month, a Bitcoin-related ETF launched and gained nearly 5% on its first day of trading on volume that exceeded 24 million shares—the second-most highly traded ETF debut ever. The ETF holds Bitcoin futures contracts,1 not actual bitcoins. This is an important factor to be aware of because futures involve transaction costs, roll costs and contango costs, all of which could contribute to under-performance or a large tracking error versus Bitcoin spot prices.

The Securities and Exchange Commission generally has been skeptical of cryptocurrencies, with chairs expressing concern that the product is too volatile, that investor protections are inadequate, and that regulations are insufficient. The agency has rejected multiple applications for ETFs that invest directly in Bitcoin, but took a more lenient view of ETFs that invest in cryptocurrency futures because the futures markets are already regulated by the Commodity Futures Trading Commission.

If you’re considering investing in cryptocurrencies, you should keep the myriad risks in mind, including that the traded value of cryptocurrencies have been volatile, the market isn’t very transparent, transactions are irreversible, consumer protections are minimal or nonexistent, and regulators haven’t clarified their approach to monitoring them. We suggest that investors who want to be involved in cryptocurrencies treat them as a speculative asset primarily for trading with money outside a traditional long-term portfolio.

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