Stock Market & Crypto Currency Update – March 27th
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: -12% (+1% last week)
- S&P 500: -17% (+1% last week)
- Nasdaq: -26% (+2% last week)
Stocks managed to climb the wall of worry last week to post modest gains across the board. This came despite continued fears of contagion in the banking crisis – most recently with Deutsche Bank. This came despite the news that in one-week Americans withdrew nearly $100 billion from banks due to fear of additional banking collapses. This came despite the Federal Reserve raising interest rates again on Wednesday leaving them now at the highest level since the 4th quarter of 2007 – the quarter the Great Recession began. This came despite China and Russia expanding their “Axis Power” relationship with one another last week. In other words, there’s a lot that wasn’t ideal in the news cycle and yet stocks rallied a bit. What’s that mean? Traditionally some would say the end of a bear market cycle. When bad news, that isn’t perhaps the worst possible news, is cause for a rally, that can mean those who intend to sell have done so. Maybe that will prove to have been the case. Conversely, it could be a sign of a bear market head fake. Recession risks this year have been rising and in part due to the highest interest rates in over 15 years and lenders having to play it more conservatively due to the bank runs which have occurred. As for a look at cryptos...
Last week I said this in reference to the previous week’s performance 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. Despite the current issues, importantly, amid the chaos and concerns – they rallied bigtime. Last week didn’t see a follow through on that rally, but importantly for digital currencies, they sustained it. Digital currencies were generally flat last week which can be considered a win as leading digital currencies sitting at six to eight month highs with bitcoin around $28,000, Ethereum above $1,700 and the Bitwise ETF, which represents the top 10 cryptocurrencies back over $10. 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: 21.23
- S&P 500 avg. P\E: 16
The downside risk is 25% based on earnings multiples right now from current levels. That’s one percent more risk than a week ago as stock prices rose while fundamentals were static. It’s 32% 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. My concern regarding contagion risk remains high and I can’t quantify where this all goes from here currently. If invested in stocks I think it’s wise to be fully prepared for a 25% 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.