Stock Market & Crypto Currency Update – April 24th, 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% (flat last week)
- S&P 500: -14% (flat last week)
- Nasdaq: -25% (flat last week)
Something somewhat remarkable happened last week. Almost nothing in the major indexes with the big three ending essentially where they started for the week. That would be unusual during any ole’ random week, however it’s that much more unusual for it to have been the first full earnings week of 1st quarter earnings reports. Speaking of those earnings...
Through Friday 18% of companies had reported earnings and the good news... 76% have reported earnings which have been above expectations. The bad news, expectations have been so low the good news isn’t really good. The average reporting company has produced earnings which are 6.2% lower than a year ago. The worst since the 2nd quarter of 2020 – at the onset of the pandemic. We’ve never experienced an earnings decline so large without a recession, which melds with what the Fed and many analysts have been suggesting of late as well. Related... Of companies to issue guidance for the current quarter and rest of the year (many aren’t right now), by a margin of nearly two to one (64%) have issued negative guidance going forward. In other words, the news doesn’t appear to be getting better here in the near term. All of this speaks to the fairly impressive stock market reaction which was muted. I remain of the mindset that the near-term bias for the market is negative with this remaining a stock pickers market for now. As for cryptos...
While stocks might have been largely unchanged the same wasn’t true for digital currencies as they ended an impressive year-to-date run by effectively failing a key test for the first time this year. As I mentioned last week: We currently are with Bitcoin over $30k and Ethereum north of $2k. Holding those levels will be key tests this week. Well, neither did with sharp double-digit declines for digital currencies during the week which left them at five to six-week lows. That includes bitcoin being back in the $27,000 range and Ethereum sitting above $1,800. The Bitwise ETF, which represents the top 10 cryptocurrencies performed better dropping only to three-week lows. The question is now what? Had the leaders been able to base and hold the levels of a week ago, it might have convinced more investors that the leaders were more than trading opportunities. Last week’s performance will likely keep skeptics on the sidelines. 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: 22.09
- S&P 500 avg. PE: 16
The downside risk is 28% based on earnings multiples right now from current levels. That’s flat with week ago as prices and fundamentals were unchanged. 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.