How Low Can Stocks & Crypto Currencies Go? – September 3rd, 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: gained 1% last week, new record high during the week
- S&P 500: flat last week, 1% away from record high
- Nasdaq: lost 1% last week, 6% away from record high
Last week played out about as the same as one might expect as investors are looking for direction. In the end there wasn’t much of a change. The major catalyst for the market during the week was Nvidia’s earnings report. It was outstanding, but not otherworldly, which is pretty much what it would have had to have been to lead a charge higher for the stock and the tech rally generally. At the same time, as investors wait to see if the Fed will cut interest rates by a quarter or a half of a point this month, the one inflation gauge of the week, the PCE, or the personal consumption index, came in just as expected.
The cost of living our lives has risen by 2.5% over a year ago, still a half point higher than the Fed’s 2% target inflation rate, but also still trending in the right direction. Due to inflation trends remaining elevated, those who’re expecting the Federal Reserve to aggressively begin cutting interest rates are likely to be disappointed. The huge market moving news this week will be the monthly job reports (ADP and BLS) as investors will be looking to see if last month’s, especially weak reports, in addition to the negative 800,000 jobs revision to the government’s prior reporting, was an outlier, or a sign of a labor market that’s rapidly in decline.
September has historically been a problematic month for the stock market. With especially high valuations for stocks this could be a wild one. As for cryptos...
Digital currencies were weak during the week with Bitcoin off about 5k to $58,000. Ethereum likewise was lower dropping about $250 to trade around $2,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost over 9% on the week. One note about cryptos... They continue to trade in a similar pattern to the tech heavy Nasdaq as opposed to a gold alternative. Gold remains near record highs. Cryptos are near the higher end of their trading range but still well off of 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: 29.51
- S&P 500 avg. PE: 16.08
The downside risk is 46% based on earnings multiples right now from current levels. That’s slightly higher over the past week as fundamentals were slightly lower but with stock prices relatively flat. 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.