The Bitcoin (BTC) price has recovered quickly over the past 12 hours, reclaiming the $61,000 level after the S&P 500 hit a new all-time high.
The market is currently bracing for volatility ahead of the Federal Open Market Committee (FOMC) meeting and interest rate cut announcement, which is expected to impact both the U.S. stock market and the cryptocurrency industry.
relevant: Markets Confirm 0.5% Fed Rate Cut. 5 Things to Know About Bitcoin This Week
There is currently a growing correlation between Bitcoin and major U.S. stocks, which provides some insight into what to expect given historical performance following previous rate cuts.
S&P 500 could fall ‘in the short term’ after FOMC
The S&P 500 Index is considered an important benchmark for tracking trends in the overall U.S. market. It represents many companies from various sectors, and the index was valued at $45.84 trillion in June 2024.
The index is currently in an uptrend, hitting a new all-time high of 5670 on the eve of the FOMC meeting. Current speculation is that traders are “pricing in” a 0.50 basis point or 0.5% rate cut.
However, historically, whenever interest rates have been cut significantly, the SPX has experienced a short-term decline most of the time.
Since 1984, the Federal Reserve has cut rates 10 times, of which 60% of the time the SPX had a negative one-month return on investment (ROI). The previous two rate cuts in 2019 and 2020 also triggered immediate corrections.
SPX returns yield after rate cuts in past years. Source: X
Therefore, any rate cut is likely to have a negative impact on the SPX in the short term. With the market trading at 0.5% “priced in,” a cautious 0.25% cut could result in a sharper decline.
Bitcoin, stock correlation coefficient rises to 0.88
Bitcoin and the S&P 500 have shown a strong correlation over the past few years, especially during the bull market in 2021. The correlation coefficient (CC) was high during Q1 2024, with both SPX and BTC hitting new yearly highs.
Currently CC is rising to high levels once again.
As you can see on the chart, the current correlation between BTC and SPX is 0.88. As the two assets move together, it is expected that they will move together after the FOMC meeting.
Bitcoin, SPX correlation and comparison chart. Source: TradingView
So if SPX experiences a decline, BTC is likely to suffer the same fate, as it has failed to break its months-long downtrend.
Given that BTC is likely to correct after the rate cut, the immediate target range is $54,000, which is where the CME futures gap formed in early September.
Bitcoin 1-day chart. Source: TradingView
However, since this is a major macroeconomic event, the downside could be larger. Therefore, a liquidity sweep to the previous low of $48,880 is possible in this scenario.
Bitcoin Expects Q4 Earnings
Despite the above bearish scenario, it is entirely based on the shorter time frame of Bitcoin and the S&P 500. As shown in the previous chart, the SPX has posted positive returns over 3, 6 and 12 month periods whenever the market has not experienced a recession, as witnessed in 1990, 2001 and 2007.
U.S. recession risk parameters. Source: Franklin Templeton
According to data from Franklin Templeton, the risk of a recession is relatively low compared to March 2024, indicating that the U.S. economy is slowly improving in terms of consumer, business, and liquidity.
So if a recession can be avoided, the SPX should shake off the short-term volatility caused by the rate cut and continue its bullish run, which is likely to be a bullish scenario for riskier assets like Bitcoin in Q4.
This article does not contain any investment advice or recommendations. All investment and trading moves involve risk, and readers should conduct their own research when making decisions.