How Low Can Stocks & Crypto Currencies Go? October 21st, 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: +1% last week, set a new record high
- S&P 500: slightly higher, set a new record high
- Nasdaq: slightly higher, set a new record high
All news seemingly continues to be good news for stocks as the incredible stock market melt up continued last week propelling the major indexes to record highs once again. Stocks rallied for the sixth straight week amid solid earnings reports and a wide and growing belief that Donald Trump will win the presidential election. One of the most discussed quotes of the week came from billionaire Stanley Druckenmiller who told Bloomberg: (Wall Street is) very convinced Trump is going to win… You can see it in the bank stocks, you can see it in crypto. Polls and betting markets continued to gravitate towards Trump throughout the week adding to the narrative. As for earnings...
Through Friday 14% of companies had reported earnings for the third quarter. 79% of companies reporting have topped expectations with earnings growth of 3.4% year-over-year which is pacing lower than what we’ve seen in recent quarters and would be the lowest in two years if it held. As for cryptos...
Just as the Druckenmiller quote surmised...what’s good for Trump is good for cryptos and last week was the best for digital currencies in quite some time leaving cryptos at the high end of their trading range and within striking distance of all-time highs. Bitcoin gained over $6,000 on the week to trade above $68,000. Ethereum added $250+ to trade back above $2,600 range. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies produced gains once again, adding about 2% for the week.
Gold meanwhile surged above $2,700 an ounce for the first time and is trading at new record highs once again. 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: 29.94
- S&P 500 avg. PE: 16.10
The downside risk is 46% based on earnings multiples right now from current levels. That’s 1% lower over the past week as fundamentals improved faster than stock prices. 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.