Stock Market & Crypto Currency Update – March 20th
Bottom Line: My first rule of money is to never let your money and emotions cross paths. The purpose of this story is to inform you as to what's possible in a near worst-case outcome for the financial markets. The reason is to understand what's possible, though unlikely, so you can plan soundly for your financial future unemotionally. The US stock market is the greatest wealth creation machine in the history of the world. Likewise, cryptos have created generational wealth for many who were early, however most investors in the crypto space have now lost money on their original investments. I want you to benefit from investing without making emotional mistakes with money. Historically, when investors attempt to time the market, they end up worse off than if they’d stayed with their original plan over 90% of the time. This is all about combating those types of mistakes.
Here's how far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -13% (flat last week)
- S&P 500: -18% (+1% last week)
- Nasdaq: -28% (+3% last week)
Where. To. Begin. For a second straight week that seems to be the appropriate place to begin the conversation. First the good news. We made it through the weekend without any additional bank failures. As I mentioned on Friday, we tend to get freaky Friday’s in the financial markets when there is a looming banking and potential financial crisis. We saw exactly that type of nervous trading activity with sharp selling on Friday to end a week of significant volatility as the markets rapidly moved with every twist and turn of news in the banking sector. So, while we were digesting multiple banking failures this time a week ago, let’s take stock of what actually happened last week.
1) Moody’s cut the rating of the entire US banking sector to negative from stable
2) Credit Suisse received a $54 billion bailout from the Swiss government to keep it from collapsing
3) First Republic Bank received a $30 billion bailout from 11 financial institutions to keep it from collapsing
It was very much an eventful week and there’s no doubt this week will continue with significant uncertainty and huge volatility. First up, the buyout of Credit Suisse by UBS. Next up the looming decision on interest rates from the Federal Reserve as another interest rate increase of a quarter point is currently expected on Wednesday. And then there are whatever the other unknowns might be. And this is all independent of the growing tensions between the west and China and Russia and whatever may be with a potential arrest of former President Donald Trump. Buckle up, it’s certain to be another wild ride. Stock valuation analysis is coming in a minute but first for cryptos...
Last week may have been one of the most important weeks yet for the base case argument for those in favor of cryptos. The lead argument in decentralization and an alternative to central banks and the related problems with them. While no one who can be taken seriously could effectively argue that digital currencies have proved more stable than central banks and the traditional financial system – despite the current issues, importantly, amid the chaos and concerns – they rallied bigtime last week.
Bitcoin tacked on $8,000 to sit above $28,000. Likewise, Ethereum added about $200 to sit close to $1,700. The Bitwise ETF, which represents the top 10 cryptocurrencies, was also up about 10% for the week. This has been a huge first test for digital currencies which they’ve passed. I can’t provide valuation analysis on any of them because they retain no inherent value. As for stocks which do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 20.94
- S&P 500 avg. P\E: 16
The downside risk is 24% based on earnings multiples right now from current levels. That’s one percent more risk than a week ago as stock prices maintained while fundamentals weakened. It’s 33% less risk than the highs reached last year. So that’s the good news. There’s less downside in the market today than there was a year ago today. But that’s also in part due to markets having sold off quite a bit since then. Here’s the change in my tact which I first adopted last Monday. Usually, I’d say I don’t expect the decline I project as possible because those types of severe selloffs are rare. My concern regarding contagion risk is high and I can’t quantify where this all goes from here currently. That’s not a good recipe. If invested in stocks I think it’s wise to be fully prepared for a 24% or so selloff from here in case we do see systemic impacts in the economy and potential panic selling in the financial markets. Otherwise, if a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If that is a problem for you, you should probably seek professional assistance in crafting your plan that balances your short-term needs with longer term objectives.