Stock Market & Crypto Currency Update – April 17th, 2023
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: -8% (+1% last week)
- S&P 500: -14% (flat last week)
- Nasdaq: -25% (flat last week)
Inflation, while exceedingly high, is a bit more benign and earnings season is here. Those were the themes last week; those will remain the key catalysts this week. It’s not often the Federal Reserve puts out a note saying they expect the economy to enter a recession and markets barely react. But that was the case last week and investors were willing to trade that bit of bad news, which wasn’t that much of a surprise, for the expectation that rate increases will soon come to an end because of inflation finally trending in a better direction. However, that mindset might be short-lived. Inflation was lower last month in large part due to lower inflation on food and energy. Energy prices are higher today than a month ago and food prices may well follow. But back to earnings where the focus will be...
The first round of big banks reported Friday, with generally better than expected results, however that hasn’t been the case with most companies which have reported so far. Through Friday only 6% of companies had reported first quarter earnings, however the news has been worse than expected. The average earnings reported thus far are 6.5% lower than a year ago. Worse than the original expectations and the worst since the 2nd quarter of 2020 – at the onset of the pandemic. We’ve never experienced an earnings decline that large without a recession, which melds with what the Fed was saying last week as well. And so, here’s the bigger picture. It’s hard to see where the upside in the market currently is with sharply declining earnings and a recession on the horizon. I expect this to quickly become a stock pickers market with more selling than buying for a bit. As for cryptos...
Last week I had this to say. Just as stocks were mostly flat over the past week, so too have the leading digital currencies. Bitcoin continues to hold around $28,000, a number it’s been near for three weeks after having dipped below 20k to start the year. Likewise, Ethereum is sitting above $1,800 and the Bitwise ETF, which represents the top 10 cryptocurrencies remains at its highest levels since November. If cryptos can continue to hold current levels as a new base, it could lead to breakouts back above $30k for bitcoin and $2,000 for Ethereum in the near future. Well, that happened and that’s where we currently are with Bitcoin above $30k and Ethereum north of $2k. Holding those levels will be key tests this week. Especially if there is stock market selling which ensues. I can’t provide value analysis for cryptos currencies because they retain no inherent value, but I can for stocks because they do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 22.12
- S&P 500 avg. PE: 16
The downside risk is 28% based on earnings multiples right now from current levels. That’s 1% more than a week ago as prices were flat however, with declining fundamentals. It’s 29% 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 28% 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.