How Low Can Stocks & Crypto Currencies Go? – May 13th, 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: 1% away – up 2% last week
- S&P 500: 1% away - up 1% last week
- Nasdaq: 1% away – up 1% last week
So... maybe there’s not going to be a correction after all? If there’s one thing the financial markets have been this year – unpredictable would be it. A couple of weeks ago the major indexes, especially the Nasdaq, were on the brink of a correction. Following two weeks of rallies including the best week of the year for the DOW – we’re much closer to new highs than a correction.
The market drew strength from fresh economic data showing optimism waning in the economy. Specifically, the University of Michigan's Consumer Sentiment Index fell hard over the past month, to 67.4 from 76 – the lowest read in six months. You might wonder why the market would rally on weak consumer sentiment and the answer is once again a belief that lowering consumer sentiment will lead to lower demand for goods and services, which will lead to lower prices and thus lower interest rates – which is mostly what the market has traded on over the past six months. That’s a lot of ifs that must come together for the narrative to hold. What’s more is that if consumer sentiment becomes too weak – that could also be a precursor to a recession which certainly wouldn’t be good for consumers or for stocks. The other important news for stocks has been earnings...
As the earnings reporting season mostly wrapped up last week, here was the scorecard. 78% of companies beat expectations and earnings grew by 5.4% year-over-year – the highest in two years. The earnings improvement has helped justify prices to a certain extent. As for cryptos...
The positive momentum for the stock market didn’t carry over to digital currencies as they lost value across the board last week. Bitcoin dropped about $2k on the week to sit near $61,000. Ethereum lost around $200 on the week to trade at $2,900. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 2% on the week and is sitting at two plus month lows. I can’t provide value analysis for digital currencies because they retain no inherent value, but I can for stocks because they do. On that note...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 27.14
- S&P 500 avg. PE: 16.07
The downside risk is 41% based on earnings multiples right now from current levels. That’s slightly improved over last week as a modest improvement in fundamentals kept up with rising stock prices. However, stocks have 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.
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.