Stock Market & Crypto Currency Update – July 31st, 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: -4% (flat last week)
- S&P 500: -4% (+1% last week)
- Nasdaq: -11% (+2% last week)
The rally continued last week as better-than-expected economic news continues to be the theme. Right in the heart of earnings season, which has generally been better than expected, we had surprisingly positive 2nd quarter economic growth reported. The 2.4% economic growth rate was well ahead of expectations and largely removed the remaining recession predictions for the back half of the year that had still existed within economists' circles. But that wasn’t the only positive report during the week as a key consumer gauge that’s tracked by the Federal Reserve showed continued moderating inflation as well. Those positive macro-economic trends overshadowed the Fed raising interest rates to a 22-year high during the week- which in my view shouldn’t be overlooked.
We’ve recently seen a jump in energy prices, and along with the added pressure of higher interest rates while the average American is carrying a record amount of consumer debt around. The positive economic news trend could potentially begin to go the other way. That’s something to be mindful of heading into the final five months of the year. As for earnings...
Through Friday, with 51% of companies reporting, 80% of companies have reported positive earnings surprises, and the average earnings beat has been by about 5.9%. The reality, however, is that while most companies are producing better than expected results, the actual numbers aren’t impressive. The decline in earnings has been about 7.3% year-over-year. An earnings recession appears to be in the offing and it's hard to imagine stock prices successfully sustaining new highs on the back of declining earnings. That’s worth watching over the next week as perhaps investors will become a bit more value minded. As for cryptos...
Digital currencies were generally flat over the past week. Bitcoin is just north of $29,000 while Ethereum is hovering below $1,900. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, was lower by about 4%. Questions about regulation remain. 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: 26.53
- S&P 500 avg. PE: 16.02
The downside risk is 40% based on earnings multiples right now from current levels. That’s 1% more risk than a week ago as prices were slightly higher with fundamentals mostly unchanged. It’s 17% less risk than the highs reached last year. 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.