How Low Can Stocks & Crypto Currencies Go? – May 28th, 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 from record highs – down 2% last week
- S&P 500: >1% from highs – off marginally last week
- Nasdaq: Record highs – up 1% last week
Once again led by Nvidia, tech stocks were the best performers during a rollercoaster ride of a week that ended with the Nasdaq in record territory. After having touched the 40,000 mark in the prior week, the DOW 30 stocks were the worst performers, which isn’t an uncommon occurrence when the index hits new milestone benchmarks. Other than Nvidia’s blowout earnings report attention in the financial markets was and remains mostly focused on attempting to figure out what’s to happen next with inflation and what the Federal Reserve’s reaction to it will be as it pertains to future interest rate policy. Most recently traders are betting on a less than 50% chance of a first interest rate cut coming in September making November currently the Wall Street consensus timeline for a potential first interest rate cut. This abbreviated trading week will be an interesting one to watch without any major economic catalysts or earnings reports to monitor. Will markets be able to continue to slowly melt up riding the wave of positive momentum that’s been in place or will stocks take a breather with all major indexes having recently touched record highs? As for cryptos...
It was another big week in the digital currency space as the SEC gave the green light to ether ETF’s, making the digital currency the second in the space to have an investment vehicle designed to make it easier to purchase a stake in the digital currency. The increased acceptance of cryptocurrencies by regulators continues to add to confidence by investors in the space that they have staying power. Bitcoin rose about $1,800 on the week to trade over $68,000. Ethereum had its best week in a year on back of its ETF news gaining around $900 on the week to trade back above $3,900. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, closed at nearly two and a half year highs. 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: 27.57
- S&P 500 avg. PE: 16.07
The downside risk is 42% based on earnings multiples right now from current levels. That’s flat over the past week as prices relative to 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.