How Low Can Stocks & Crypto Currencies Go? – May 20th, 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: Record high – up 1% last week
- S&P 500: Record high – up 1% last week
- Nasdaq: > 1% away – flat last week
Record highs are here once again with the DOW and S&P 500 posting strong weeks again last week to close at the highest levels either of those indexes have ever seen with the Nasdaq only a good day away from potentially setting new highs as well. The rally also led the DOW to a close above the benchmark number of 40,000 for the first time. It was only a few weeks ago that a correction appeared to be in the cards. A few weeks later, here we are with record highs. One dynamic shift most recently in the rally that helped propel stocks to new records was a shift in leadership. While AI related stocks have been the biggest gainers thus far this year, it was information technology and real estate related names that led the way over the past week. If this recent leg of the rally to new highs is to be sustainable, a rotation in leadership could be a key to that being the case. Especially with the market currently proving to be historically expensive on a fundamental basis. The biggest news during the week, that helped to provide additional optimism on Wall Street, was the monthly Consumer Price Index Report.
While Tuesday’s PPI Report, measuring wholesale inflation should a continued reacceleration of inflation at the wholesale level in April, the more important CPI did not. Consumer inflation came in at 3.4% on an annualized basis for the prior month, which while still far higher than the 2% Federal Reserve target, was the first month in the year in which consumer inflation hadn’t trended higher. This was a key for investors who’d had a little money on the sidelines stepping into the market with it last week. As for cryptos...
The biggest winners of the past week were digital currencies which broke out of a multi-month slumber to post big gains last week. Bitcoin rose about $6k on the week to $67,000. Ethereum gained around $180 on the week to trade back above $3,000. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was up about 9% after having closed at close to three-month lows previously. One big storyline in the digital currency space continues to be the normalization of the tokens for mainstream investors through ETFs. On that note a closely watched decision by the SEC will happen this week to determine if Ether will gain authorization for ETFs investing in the token. 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: 27.56
- S&P 500 avg. PE: 16.07
The downside risk is 42% based on earnings multiples right now from current levels. That’s a bit more risk over the past week as prices rose while fundamentals were static. We currently 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.