Stock Market & Crypto Currency Update – April 3rd, 2023
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, however most investors in the crypto space have now lost money on their original investments. 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 far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -10% (+2% last week)
- S&P 500: -14% (+3% last week)
- Nasdaq: -24% (+2% last week)
For a second consecutive week stocks managed to climb the wall of worry to close out the first quarter on a positive note with the S&P 500 posting an impressive 7% gain in the quarter while the tech-heavy Nasdaq fought back with its best quarter in over two years – up 17% - though the index still remains in bear market territory. The rally over the past couple of weeks took hold despite continued concerns, about the state of the global banking system, the Federal Reserve raising interest rates to the highest level since the 4th quarter of 2007 – the quarter the Great Recession began and despite growing geopolitical uncertainty with China at the root of it. Two weeks ago, they expanded their relationship with Russia. Last week they did the same with Saudi Arabia. Those developments come amid reports suggesting China is readying for a potential move against Taiwan.
The good news over the short term is that inflation does appear to be moderating, though it remains exceptionally high, and the first quarter, when reported will show continued economic growth – The Atlanta Fed’s GDPNow tracker’s most recent first quarter estimate calls for 2.5% growth. Looking further out however, there’s as much uncertainty about the economy as we’ve had since peak pandemic policy was in place around the world. That includes what is likely to soon be a rocky earnings reporting season for corporate America - which has the potential to show declining earnings and an acceleration of job losses. In other words, the news cycle for stocks isn’t likely to get easier from here. Can markets continue to climb the wall of worry? That is the question. As for a look at cryptos...
The first quarter wasn’t just the best in a while for stocks, it was for digital currencies as well – including the leaders, starting with bitcoin posting three consecutive positive months with bitcoin remaining at $28,000, a number it’s held for two weeks after having dipped below 20k to start the year. Likewise, Ethereum is sitting above $1,800 and the Bitwise ETF, which represents the top 10 cryptocurrencies is back to its highest levels since November. This has been a huge first test for digital currencies which they’ve passed. I can’t provide valuation analysis on any of them because they retain no inherent value. As for stocks which do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 21.97
- S&P 500 avg. P\E: 16
The downside risk is 27% based on earnings multiples right now from current levels. That’s two percent more risk than a week ago as stock prices rose while fundamentals were static. However, it’s 30% less risk than the highs reached last year. So that’s the good news. There’s less downside in the market today than there was a year ago today. But that’s also in part due to markets having sold off quite a bit since then. My concern regarding contagion risk remains high and I can’t quantify where this all goes from here currently. If invested in stocks I think it’s wise to be fully prepared for a 27% or so selloff from here in case we do see systemic impacts in the economy and potential panic selling in the financial markets. Otherwise, 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.