How Low Can Stocks & Crypto Currencies Go? – April 8th, 2024
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. 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 close the DOW, S&P 500 & Nasdaq are to their all-time highs.
- DOW: 2% away
- S&P 500: 1% away
- Nasdaq: 1% away
The first quarter performance for stocks was the best in five years as optimism reigned supreme. Despite a rally on Friday following another strong jobs report, the first week of the second quarter was the worst of the year so far. The question is whether that will become a theme for what’s to come. Investors are currently caught in between two competing ideas. The stock market has been over bought/overvalued for over two months based on historical value metrics. To help justify current stock prices, companies need to report strong earnings. At the same time, if companies are reporting strong earnings, that’s likely due to an economy that’s still running hot. An economy that’s still running hot almost certainly means inflation will continue to remain high. High inflation means the Federal Reserve won’t cut interest rates and in fact could even revisit the possibility of raising them still further if inflation continues to reaccelerate (one Federal Reserve governor mentioned this as a possibility on Friday). Much of the rally in the first quarter was attributed to expectations that the Federal Reserve would be cutting interest rates a minimum of three times this year.
The quandary that investors face as we’ll soon enter the second quarter earnings reporting season is likely to produce company specific stories playing out as earnings are reported with the potential for a market that incrementally corrects. It’s hard to see how corporate earnings can be great without inflation also being a persistent problem. Anything is possible in terms of market action over the short term, however in the end, fundamentals do win out. As for cryptos...
For the third week out of four digital currencies traded lower last week (though they have bounced back a bit over the weekend). Bitcoin is back to trading a bit under $70k. Ethereum’s losses totaled more than $200 on the week to trade back below $3,400. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 2% on the week. One of the looming question marks is whether digital currencies can trade independent of interest rates and expectations about Fed policy. That’s in focus for many currently trading in the space. I can’t provide any value analysis for digital currencies because they have 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: 28.25
- S&P 500 avg. PE: 16.06
The downside risk is 43% based on earnings multiples right now from current levels. That’s a bit lower than last week due to stocks trading lower, though it remains the most fundamental risk that’s been priced into the market since April of 2021 when the impact of rising inflation was first being felt. For perspective, the pandemic cycle is the only time valuations have been this high over the past decade and prior to this cycle, you’d have to go back to the Great Recession in ‘08- ‘09 to find prices this high on a fundamental earnings basis.
Still, current prices are 19% less risk than the highs reached during the peak of the pandemic bubble. The bottom line is that the market is somewhat historically expensive at these levels. Still, 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.