Stock Market & Crypto Currency Update – May 30th, 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% (-1% last week)
- S&P 500: -12% (+1% last week)
- Nasdaq: -19% (+2% last week)
It was a mixed market last week with the DOW a bit lower and tech stocks in the tech heavy Nasdaq sharper higher by the end of the week – led by A.I. spending by corporate America and optimism about a debt ceiling deal, which was founded, as President Biden and House Speaker Kevin McCarthy came to terms on the framework for a deal which will now be presented to Congress. While the Congressional vote is more than a formality and the train could potentially come off of the tracks, that seems unlikely. The deal, should it go through, provides clarity on government spending until January of 2025 when a new Congress will be sworn in as well as potentially a new president. With the debt ceiling drama potentially being taken off of the table the question becomes one of, what now? As in what’s the catalyst markets will look towards?
That could head in one of two directions. Belief that the A.I. boom is enough to keep the good vibes going, or a closer look at inflation and the Fed, which while moderating is still extraordinarily high – in fact, that is still far greater than double the Fed’s target – which means rates almost certainly will be raised again which will keep growth under pressure and could pressure 2nd tier banks into difficult circumstances throughout the summer. As for cryptos...
Digital currencies moved higher along with technology stocks over the past week. Bitcoin enters this week sitting just below $28k – having added greater than $1,500 last week. Ethereum added about $100 to sit at $1,900. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies was essentially flat – meaning that the digital currency rally remained concentrated with the leaders. The biggest short term crypto questions regarding 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. One test that we likely won’t see is how they would have performed if there hadn’t been a debt ceiling deal reached. That would have been an interesting test of potential staying power and a store of value during times of government adversity. 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: 24.34
- S&P 500 avg. PE: 16.01
The downside risk is 34% based on earnings multiples right now from current levels. That’s flat with a week ago as prices rose, and fundamentals slightly improved as well. 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.