Stock Market & Crypto Currency Update – October 23rd, 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% (-2% last week)
- Nasdaq: -19% (-2 last week)
Last week’s selloff not only erased the October gains achieved through the first half of the month, but also left all three major indexes once again in correction territory (a decline of 10% or more from highs), with the Nasdaq close again to bear territory (a decline of 20% of more). A combination of lack luster earnings, ongoing inflation pressures and strong bond market moves have continued to weigh on stocks. Speaking of earnings...
While the US economy hasn’t been in a technical recession since the first half of last year, we’re very much mired in an earnings recession for corporate America with three consecutive quarters of negative earnings growth and potentially a fourth in the making. Through Friday, with 17% of companies reporting, earnings were pacing a decline of 0.4%, which if the decline holds would mark a full year of year-over-year earnings declines. It’s hard to expect positive price movement in stocks when earnings are consistently in decline. There was a bit of positive news from a market perspective last week as Federal Reserve Chairman Jerome Powell indicated that the Fed is inclined to hold off on raising interest rates again for now. Then there’s the bond market which is a topic I’ve spoken often of throughout this year...
The inverted yield curve and historically high interest rates which can be obtained through government treasuries continue to be headwinds for markets as well and last week this situation reached a new milestone. Ten-year treasuries hit above 5%, meaning buyers of ten-year government bonds can now lock in guaranteed returns of 5%. This hasn’t happened since 2007, which could also be a bit of an ominous sign about the overall state of the US economy. Many economists still believe we’re at a high risk of recession and the last time 10- and 30-year bonds were at current levels was 2007 – at the onset of the Great Recession. There are a lot of flashpoints moving in a similar direction from earnings to inflation and bonds. And from a stock market perspective, high bond rates create additional competition for investment dollars. As for cryptos...
While it was a rough ride for stocks last week the opposite was true in the digital currency space as it had its best week since June with across-the-board gains highlighted by Bitcoin‘s move back above $30,000 for a weekly gain of 10% and Ethereum posting a 4% to hit back above $1,600. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, posted the biggest gains of all up about 14% on the week. Optimism about regulators potentially allowing additional crytpo ETFs to hit the market – including a spot bitcoin ETF, drove performance. Still, 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: 24.11
- S&P 500 avg. PE: 16.03
The downside risk is 34% based on earnings multiples right now from current levels. That’s 1% lower as stocks were lower but also with slightly declining fundamentals. It’s 23% 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.