How Low Can Stocks & Crypto Currencies Go? – July 1st, 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 high – down >1% last week
- S&P 500: 1% away from record high – down slightly last week
- Nasdaq: Hit a new record high during the week – up 1% last week
The first half of the year was an incredible ride for investors as the AI trade led to massive momentum behind the Nasdaq and S&P 500 producing a 14.5% return for the benchmark index. As we now get ready for the back half of the year, we do so amid continued improvement in inflation metrics which show the potential for inflation to finally come down to the Federal Reserve’s 2% target rate before this year’s end. Friday’s personal consumption index report showed we spent an average of 2.6% more on goods and services over the previous month compared to a year ago. That was down from greater than 3% in the previous month and in line with market expectations. Inflation, and more specifically, the Federal Reserve’s interest rate policy was obviously a huge secondary story – to the AI boom – in the first half of the year. Given sky-high valuations for AI companies like Nvida following the massive rally, it's likely the fed will take center stage for the back half of the year along with November’s elections. The biggest question entering third quarter trading will be whether the tech heavy Nasdaq will be able to continue to avoid a long-anticipated correction. Simply flat trading for the back half of the year would be considered a massive win given the huge first half gains. As for cryptos...
Digital currencies were lower across the board for a third consecutive week as we’ve continued to see decoupling with the trading activity of cryptos and tech stock plays. On that note one firm, Stifel, continues to believe that the recent correction in cryptos is foretelling a coming correction in the tech-heavy Nasdaq. The analyst’s call notes the tight trading pattern between digital currencies and the Nasdaq as a sign that the correction really might happen this time. We shall see.
Bitcoin dropped another three thousand dollars in value to trade at seven-week lows around $61,000. Ethereum has given back just about all of the gains posted following the SEC’s decision to allow Ether ETFs. Ether was off about $120 dollars on the week to trade under $3,400. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 3% on the week. 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: 28.38
- S&P 500 avg. PE: 16.07
The downside risk is 43% based on earnings multiples right now from current levels. That’s flat over the past week as stock prices rose slightly with similar fundamentals. 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.