How Low Can Stocks & Crypto Currencies Go? October 7th, 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: Slightly higher last week, set a new record high
- S&P 500: Slightly higher last week, set a new record high
- Nasdaq: Slightly higher last week, 2% away from record high
The incredible stock market melt up continued last week following Friday’s especially questionable government jobs report from the Bureau of Labor Statistics. The government jobs report, showing 254,000 new jobs added during September, stood in stark contrast to the prior two months' worth of reporting, considerably exceeding expectations. Notably, the report was also in direct contrast to ADP’s Private Sector jobs report, which has proved to be the far more accurate gauge of private sector employment. The ADP Report showed only 143,000 private sector jobs added during the month. Given that government employment only accounted for 31,000 of the government jobs added, there’s a lot that doesn’t add up with the government report. Notably, in August, the Federal government said it had overstated jobs growth in these monthly reports by 818,000 jobs over the prior year. It would appear that the BLS is continuing to wildly overstate job growth.
Nevertheless, investors took it as a sign that the Federal Reserve has engineered a “soft landing”, or an end to the high-interest rate cycle without sparking a recession. Time will tell. As for cryptos...
For the first time in a long time digital currencies didn’t trade alongside the Nasdaq’s performance. While the Nasdaq was slightly higher for the week, Bitcoin was off about 3k to $62,000. Ethereum likewise was lower dropping about $150 to trade above $2,400. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies did manage to produce a gain, rising by about 2%. Gold meanwhile continues to be the steadiest asset as it held near recent highs at $2,670 an ounce. Cryptos are near the higher end of their trading range but still well-off 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: 30.02
- S&P 500 avg. PE: 16.09
The downside risk is 46% based on earnings multiples right now from current levels. That’s flat over the past week as fundamentals and stock prices both slightly improved. We currently have a cycle with 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.