Stock Market & Crypto Currency Update – June 12th, 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: -8% (flat last week)
- S&P 500: -10% (+1% last week)
- Nasdaq: -17% (+1% last week)
The good vibes on Wall Street continued for the most part last week as stocks continue to remain near 1-year highs while the major indexes continue to remain well below all-time highs. For the Nasdaq in particular, while still being the hardest hit of the big three, it's now on a seven-week winning streak for the first time since 2019 as AI optimism has reigned supreme, perhaps creating a short-term bubble in some of the related plays in the tech space. But the best news of all for the week was what happened with smaller companies.
Just as the best jobs news last month was with the smallest companies, the biggest rallies over the past week were with smaller publicly traded companies. Last week I said this: Recently market gains have been concentrated in a limited number of companies and industries within technology. If there’s to be another leg up for stocks it’ll need to come through the participation of stocks that have lagged year-to-date. Will that happen? For at least a week anyway, the answer was yes, which is an encouraging sign if there’s to be sustainability within holding the recent market gains. As for what’s to happen next? It’s a bombshell week of market moving news. We’ll receive both the Consumer Price Index, or inflation, rate for May and on Wednesday we will hear what the Fed will choose to do with interest rate policy. The market has priced in a 71% chance for rates to remain unchanged. There could be a small relief rally if that happens and significant selling if the Fed continues to raise rates. As for cryptos...
What a mess. As in what a mess the digital currency space continues to be. The SEC moved aggressively to crackdown on crypto platforms Binace and the largest, Coinbase. The Securities and Exchange Commission has sued both platforms alleging fraudulent sales of unregistered securities. What’s more is Binace isn’t even allowed to be transacted with US Dollars after the fallout from the moves against the entity by the feds. Some of the fiercest advocates will say these actions justify the need for decentralization. The most skeptical will say that given the history of fraud in this industry highlighted by the spectacular collapse of FTX, and the known use of digital currencies by organized criminals, this is as big of a red flag as there is.
While lower for the week, digital currencies remained somewhat remarkably resilient given the obvious issues facing the space going forward. Bitcoin enters this week sitting above $25,000 – having lost about $1,500 last week. Ethereum is lower at $1,750 - losing $150. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies was the best performer, losing only about 2% for the week. 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. 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: 24.88
- S&P 500 avg. PE: 16.01
The downside risk is 36% based on earnings multiples right now from current levels. That’s 1% more risk than a week ago as prices rose, and fundamentals were flat. It’s 21% less risk than the highs reached last year. If invested in stocks, I think it’s wise to be prepared for more volatility going forward than what we’ve seen of late. If the goldilocks scenario plays out there’s room for upside. But at this point with prices where they are, it pretty much needs to for there not to be downside risk over the near term. 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.