Hello there,

A terrific Thursday to you as markets start to tumble again with the U.S. Federal Reserve pledging to stay on top of inflation and evidencing a willingness to take more aggressive steps to tighten monetary policy.

In brief (TL:DR)

• U.S. stocks closed lower on Wednesday with the Dow Jones Industrial Average (-1.29%), the S&P 500 (-1.23%) and the Nasdaq Composite (-1.32%) all down.

• Asian stocks struggled back from early lows after a tough session for global equities.

• Benchmark U.S. 10-year Treasury rose four basis points 2.33% (yields rise when bond prices fall) as the prospect of U.S. Federal Reserve balance sheet runoff and more aggressive tightening starts to hit home.

• The dollar edged higher.

• Oil was flat with April 2022 contracts for WTI Crude Oil (Nymex) (-0.10%) at US$114.82.

• Gold rose with April 2022 contracts for Gold (Comex) (+0.26%) at US$1,947.70.

• Bitcoin (+1.93%) rose to US$43,096, moving against the general tide of other risk assets and with Ether buoyed by a prospective software upgrade that could be a gamechanger.

In today's issue...

1. Bull, Bear or Rangebound, what sort of market is this?

2. Adobe’s Problem Isn’t Russia, It’s Vision

3. Ether Edges Up from Bitcoin

Market Overview

Markets are being roiled as U.S. Federal Reserve officials signal they won’t shy away from more aggressive action to tame the fastest pace of inflation in four decades.

Commodity prices have staged erratic rallies amid supply pressures and sanctions as Russia’s attacks on Ukraine show no sign of abating, and mounting concerns about the impact on the global economy leave investors struggling to identify havens.

A sharp rotation from bonds to equities, which had emerged as an attractive inflation hedge after their steep selloff, may be losing momentum while cryptocurrencies ended mixed.

Asian markets were mixed Thursdaywith Tokyo's Nikkei 225 (+0.25%) and Sydney’s ASX 200 (+0.12%) up, while Seoul's Kospi Index (-0.20%) and Hong Kong's Hang Seng Index (-0.94%) were down.

1. Bull, Bear or Rangebound, what sort of market is this?

• The average U.S. stock market bull lasts for 3.8 years according to data going back to 1932, with the longest lasting from 2009 to 2020 with a bull market defined as a 20% increase in stocks.

• But looking back as we approach 2 years since the pandemic lows, some investors are understandably wondering if this isn’t a good time to take some money off the table.

On the 2-year anniversary since the bottom of the coronavirus-induced stock market crash of 2020, analysts are as divided as ever on what sort of market we’re in – mid-bull, late-bull, early-bear, or rangebound?

Depending on who you ask, the bull market may just be starting or over already and they can’t all be right.

To be sure, the average U.S. stock market bull lasts for 3.8 years according to data going back to 1932, with the longest lasting from 2009 to 2020 with a bull market defined as a 20% increase in stocks.

So what changed?

Recall that 2009 was when the U.S. Federal Reserve introduced this idea of “quantitative easing” – the purchase of assets such as U.S. Treasuries and mortgage-backed securities.

Having overcome that “moral hazard” after the 2008 Financial Crisis, the Fed, which is the only entity with the license to create money out of thin air, has since gone on to also prop up money market mutual funds as well as buy bonds of some of America’s biggest companies.

That implied Fed “put” has meant that asset prices have until the pandemic, been on a relentless ascent.

And even when the pandemic brought the markets to its knees, the Fed was at hand to flood the markets with liquidity and buying which has since seen an incredible run up in asset prices from pandemic lows.

But looking back as we approach 2 years since the pandemic lows, some investors are understandably wondering if this isn’t a good time to take some money off the table.

There are some who believe that our current market conditions are merely a continuation of the secular bull market which began in 2009, and since secular bull markets tend to last between 15 to 20 years, this one still has plenty of legs to run.

Earnings for American companies continues to be strong, and people aren’t scared to death by an unknown pandemic with no vaccines.

Savings are also far higher today than they were on the even of the 2008 Financial Crisis, with American households increasingly becoming a source of buying activity in the stock markets.

Typically, high leverage and low savings could see liquidity flushed out of the system and the bull market ends abruptly.

There are others who suggest that markets are already in bear territory without knowing it, arguing that the U.S. economy looks to be late in the expansion cycle, with GDP and earnings decelerating, inflation running hot and a Fed policy that is tightening.

Sure, but that assumption assumes the Fed will risk a recession and not reverse its policy.

U.S. Federal Reserve Chairman Jerome Powell’s new policy direction of “nimbleness” suggests that the central bank remains ready at the taps should the markets run dry.

Labeling the market is probably less valuable than determining what an individual investor’s place in it is, whether it be to dollar cost average on the dip, or to hold for the long-term, these considerations are far more relevant on a personal level.

It’s been said that bulls make money, bears make money, pigs get slaughtered.

2. Adobe's Problem Isn't Russia, It's Vision

• While on the surface, it would seem that Adobe’s shutdown of operations in Russia and Belarus as well as the hit to business in Ukraine of US$87 million collectively would barely show up as a rounding error, the bigger challenges are long-term.

• A price increase is prefigured for later this year, the first since 2018, and Adobe’s share price slipped a further 9% yesterday, but until and unless it has a new vision for the future, it’s halcyon days may be behind it.

When the pandemic hit and lockdowns ensued, tech companies that were providing essential services that could facilitate remote working recovered in the post-Fed liquidity boost.

Since then, many have struggled to regain their pandemic glory, with heady valuations and uncertain paths forcing investors to think long and hard about the earnings multiples that they’ve been commanding.

One of these companies has been Adobe (-9.34%).

While on the surface, it would seem that Adobe’s shutdown of operations in Russia and Belarus as well as the hit to business in Ukraine of US$87 million collectively would barely show up as a rounding error, the bigger challenges are long-term.

Continuing to do business in Russia would have been an unpopular move (see Nestle) and in any event, Adobe has more than enough to cover from elsewhere, but not exactly without raising fees.

The company that coined the term “Photoshopped” is responsible for a range of creative tools that designers have grown accustomed to use and love and made Silicon Valley a lure for tech investors back in the day.

And while Adobe has successfully shifted from a box model of sales to a cloud subscription model, its biggest challenge is innovation, with double-digit quarterly growth beginning to slow.

Adobe is being challenged by startups like Canva, a design tool that is extremely easy to use even for someone with no experience or background in creative software.

Apps from TikTok and Instagram already come with a variety of built-in tools and tricks that make it easy to churn out professional-looking videos and images with a couple of taps.

Gone are the days of slaving for hours in front of complicated video and sound editing software to achieve that post-production perfection.

If content is king, then so is speed and Adobe is drawing from an ever-shrinking pool of customers.

That Adobe is having to play catch-up is evident from its ill-formed patchwork freemium model that is an obvious tip of the hat to Canva.

A price increase is prefigured for later this year, the first since 2018, and Adobe’s share price slipped a further 9% yesterday, but until and unless it has a new vision for the future, it’s halcyon days may be behind it.

3. Ether Edges Up from Bitcoin

• Over the past week, Ether has gained over 16%, while Bitcoin just a little over half that amount, mainly because of a successful soft launch of what’s called the “Merge.”

• If fully adopted in the coming months, which many investors expect to be the case, Ethereum will be able to handle more transactions than ever before, at greater speed and for lower transaction fees.

Always the bridesmaid never the bride, through the relatively short history of cryptocurrencies, Ether has always played second fiddle to Bitcoin, not just in terms of visibility, but also price action.

That changed last week when the world’s second largest cryptocurrency by market cap, Ether, moved beyond its statistical correlation with Bitcoin, advancing in greater magnitude and faster than the benchmark cryptocurrency.

At its core are prospective upgrades to the Ethereum’s core software that could potentially see it move to a proof-of-stake means for securing its blockchain that would shake off the long-held view that cryptocurrencies harm the environment.

Over the past week, Ether has gained over 16%, while Bitcoin just a little over half that amount, mainly because of a successful soft launch of what’s called the “Merge.”

The last test of this software started on March 15 and despite some initial glitches such as minor error messages, appears to be running smoothly.

If fully adopted in the coming months, which many investors expect to be the case, Ethereum will be able to handle more transactions than ever before, at greater speed and for lower transaction fees.

More importantly, the Ethereum blockchain will be secured using less electricity and run far more efficiently.

While there are other blockchains that use proof-of-stake, none has had the same level of popularity, development and applications as Ethereum, which remains heads and shoulders ahead of the rest.

If Ethereum shifts successfully to a proof-of-stake, being the second largest cryptocurrency by market cap and having been around the longest makes it a potential investment target for more ESG-conscious institutional investors who may have wanted to go in on Bitcoin, but could not due to their ESG-restricted mandates.

The move will also lower the total supply of Ethereum available in circulation.

Those holding Ether can “stake” their Ether in special staking wallets that will secure the Ethereum blockchain and help to order transactions, meaning that the total supply of Ethereum for other purposes would diminish.

While this would potentially increase the price of Ether, the larger amounts of transactions facilitated would result in lower fees as gas fees and prices would come down – gas is the transaction fee for Ethereum.

Stakers will receive Ether as a reward for staking and may be less likely to be pressured to sell Ether because they won’t be incurring operating expenses in dollars to mine the cryptocurrency.