Stock Market & Crypto Currency Update – May 1st, 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: -7% (+1% last week)
- S&P 500: -13% (+1% last week)
- Nasdaq: -24% (+1% last week)
What a weird week in the stock market. The week started with First Republic Bank reporting earnings which reflected a bank on the brink of collapse. The first quarter GDP Report came in much weaker than expected – with growth of only 1.1% - about half of what had been forecast. It’s a figure which places the US economy at imminent risk of recession. The week ended with the failure of First Republic Bank, the first since the banking crisis began in mid-March. In breaking news today, JP Morgan has agreed to take over First Republic. The market focused instead on the likelihood of the Federal Reserve ending interest rate increases sooner rather than later and earnings that aren’t good – but aren’t as bad as feared either.
As recently as a week ago the average earnings decline was checking in at greater than 6%. A week later, with just over half of all companies having reported earnings, the average decline stands at 3.7%. Not good certainly, but not as bad as the trend had been either. Over the short term I remain skeptical about the market’s ability to rally from here in addition to having concerns about entering a recession and the extent of the fallout from the banking crisis. The improved news is that following the First Republic failure, there don’t appear to be other banks especially close to being on the brink. Time will tell. As for cryptos...
Bitcoin & co. Bounced back last week. While still remaining below recent highs above $30k, bitcoin added a couple thousand over the past week to sit above $29k. Likewise Ethereum is sitting close to $1,900 after adding about a $100. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, was essentially flat showing that the strength last week was largely isolated to the leaders. Questions about regulation remain and Coinbase, the largest crypto marketplace, is locked in a battle with the feds that appears to be escalating. That’s worth watching in the weeks to come. Will the federal government seek to compete with the current crypto players, or will they allow the digital currency space to evolve as it is? 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: 22.29
- 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 were slightly higher however with slightly improved 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.