How Low Can Stocks & Crypto Currencies Go? November 18th, 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.
Let’s start with a look at the DOW, S&P 500 & Nasdaq.
- DOW: -2% last week (2% away from a record high)
- S&P 500: -2% last week (2% away from a record high)
- Nasdaq: -3% last week (3% away from a record high)
It’s fair to say that the market needed a breather after the incredible post-election rally that played out over the previous week. By mid-week that’s exactly what we saw happen. While there is room for optimism in the financial markets over the incoming Trump administration, that at a minimum will likely quickly eliminate 970 new business regulations imposed by the Biden administration that came at a cost of $1.7 trillion, it’s also the case that stocks had runup to historically high valuations. One of the near-term risks in the economy, as consumers and investors alike have quickly become more optimistic about the future following the Trump victory, is a reacceleration of inflation.
The Federal Reserve has already cut interest rates multiple times and yet inflation is still running at 2.6%, above the Fed’s 2% target rate. With increased demand for many goods and services, without a corresponding policy changes set to take place until January 20th, at the earliest as Trump is sworn into office, the potential for a short-term boost in inflation is real. This could mean the Fed is more cautious with rate cuts going forward which is something Federal Reserve Chairman Jerome Powell already indicated is likely to be the case. As for cryptos...
While the stock market rally paused, the Trump Train rally with digital currencies was full speed ahead. Nowhere are regulatory changes expected to have a greater impact than with cryptos. The general belief remains that Donald Trump, a crypto advocate, will eliminate regulatory headwinds facing the industry. Bitcoin gained over $10,000 to trade above $90,000 for a new record. There’s also the general belief that it’s not a question as to if $100,000 will happen but how quickly it will get there. The same wasn’t true with Ethereum however... Ether is actually a bit lower than a week ago trading just north of $3,100. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies ran up about 14% for the week and has gained close to 50% over the past week and a half following the election results.
Gold, meanwhile, continued its post-election decline dropping about $150 on the week to about $2,550 an ounce. 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
- 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 than a week ago as fundamentals were static, and stocks sold off. We 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.