Stock Market & Crypto Currency Update – May 8th, 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: -9% (-2% last week)
- S&P 500: -14% (-1% last week)
- Nasdaq: -24% (flat last week)
What a wild week in the stock market. Following the First Republic Bank failure in the previous week, regional banks spent last week in the crosshairs of skeptics wondering which bank would fail next. Given the prevalence of California bank failures to date, Cali’s regionals led by PacWest, had brutal weeks as their shares sold off under speculation, they could be next. Having made it through the weekend without another failure could be considered a success. During the week we had the Federal Reserve raising interest rates yet again, in the most aggressive interest rate raising cycle in 40 years, in an effort to combat the worst inflation in over 40 years. And then there was Friday’s jobs report.
Seldom has a jobs report been more widely misreported and misunderstood than this one just in from the Bureau of Labor Statistics. The headline number of 253,000 jobs having been added was viewed/reported as being an acceleration of hiring. However, the government was found to have wildly overestimated previous job gains in prior months leading to 149,000 fewer jobs having been added. The net effect was a gain of only 104,000 new jobs, the worst report in nearly three years. Markets sold off big to start the week, they rallied big to end the week and were flat to lower in the end. Meanwhile, and importantly, earnings have continued to improve as earnings season has rolled along. Through Friday 85% of companies had reported earnings. The average outcome has been a decline of 2.2%. Not good, but about a third of the decline we saw at the onset of the reporting season. As for cryptos...
Flat to lower pretty much sums up Bitcoin & co. over the past week. Bitcoin enters this week a few hundred dollars lower sitting just below $29k. Ethereum, meanwhile, is flat sitting just above $1,900. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, was the best performer of the bunch posting gains which pushed it back to its highest level in about three weeks – showing there was greater strength in the 2nd tier of digital currencies most recently. Questions about regulation remain and Coinbase, the largest crypto marketplace, is locked in a battle with the feds that appears to be escalating. That’s worth watching in the weeks to come. Will the federal government seek to compete with the current crypto players, or will they allow the digital currency space to evolve as it is? I can’t provide value analysis for cryptos currencies because they retain no inherent value, but I can for stocks because they do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 23.94
- S&P 500 avg. PE: 16.01
The downside risk is 33% based on earnings multiples right now from current levels. That’s 5% more risk than a week ago as prices were slightly lower, however with significantly declining fundamentals. It’s 24% less risk than the highs reached last year. 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 33% 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.