Stock Market & Crypto Currency Update – May 22nd, 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% (+1% last week)
- S&P 500: -13% (+1% last week)
- Nasdaq: -21% (+3% last week)
Last week proved to be the best in about two months for stocks as they were led by technology companies rallying on the back of optimism that a debt ceiling deal would be struck before June and a general lack of negative news popping up. Federal Reserve Chairman Jerome Powell also hinted once again that the Fed may be nearing the end of the interest rate rising cycle. That said, there’s no debt deal that’s imminent, it’s unclear what a deal might look like if one is struck within the next week and half and that of course means there’s really no way of knowing what the impact may be for corporate America. If visibility remains limited on this issue, stocks are likely to reflect it with sharp selling as many companies are sitting at or near 52-week highs, despite the major indexes still sitting well below their all-time highs reached late in 2021 through January of last year based upon the index. I’m skeptical about the recent rally and think over the short-term potential upside is limited and the potential for significant selling heading into and through the summer remains high. As for cryptos...
Digital currencies were largely flat to higher after having posted their worst week in six months the previous week. Bitcoin enters this week sitting above $26k. Ethereum which was up slightly is hanging out around $1,800. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies was essentially flat as well. Questions about regulation remain. Regulators are continuing to cast a shadow over the sector as it’s unclear where and how new threatened regulations from world governments, but especially our federal government, will impact. The appetite for sheer speculation is nearly non-existent with institutional investors, leaving the digital currency markets to largely move on the basis of smaller investors which are more susceptible to economic risks. The window we’re entering in is another which could be telling for the base case argument for digital currencies as a place to hedge risk against central banks and governments. If there isn’t a debt deal and stocks selloff what will happen with digital currencies? If they were to rally in the face of turmoil, that would add validity to the argument that they can be a store of value. If they were to selloff along with stocks – not so much. 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: 24.27
- S&P 500 avg. PE: 16.01
The downside risk is 34% based on earnings multiples right now from current levels. That’s one percent more risk than a week ago as prices rose, and fundamentals were essentially unchanged. It’s 23% 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 34% 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.