How Low Can Stocks & Crypto Currency Go? – February 5th, 2024
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 close the DOW, S&P 500 & Nasdaq are to their all-time highs.
- DOW: Record high
- S&P 500: Record high
- Nasdaq: -3%
It was a fourth straight winning week for stocks with fresh record highs for the DOW and S&P 500 during the busy news week as earnings season continued to roll along. Aside from earnings, the Federal Reserve’s first interest rate decision of the year was in focus along with Friday’s red hot jobs report. Another key event happened Friday when Meta, parent of Facebook, Instagram and others, announced strong earnings and its first ever dividend – which led to a huge gain of over 20% on the day. Let’s break the events down starting with earnings.
Through Friday just under half, 46% of all companies had reported earnings. Notably, it was the best week of reported results yet and turned around the entire outlook for earnings season. A week ago earnings had declined by 1.4% for the companies that had reported. That’s now flipped to 1.6% growth for the quarter. Fundamental earnings growth is key if there’s going to be justification for record high stock prices. On the Fed front, as expected the Federal Reserve left interest rates unchanged at 20+ year highs. When reading tea leaves to infer what might happen next, it appeared unlikely the Fed would be changing interest rate policy in its next meeting in March as well. Any prospects for potentially seeing the Fed cut interest rates in March, which was already unlikely, seemed to disappear with the strong jobs report on Friday which showed 353,000 jobs added in January to start the year along with wage growth with paced above the current inflation rate. As for cryptos...
After weeks of wild volatility to start the year in the digital currency space, highlighted by the SEC’s decision to approve spot bitcoin ETFs a few weeks back, there’s been relative calm over the past week with tokens generally flat to a bit higher across the board. Bitcoin is holding $42,000 which looks to be its new key support level. Ethereum is sitting at $2,300 which has been its key level in recent weeks. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies posted a gains for a second straight week. I can’t provide any value analysis for digital currencies because they have 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: 26.55
- S&P 500 avg. PE: 16.04
The downside risk is 40% based on earnings multiples right now from current levels. That’s flat with a week ago with stock prices rising but with fundamentals also improving sufficiently to keep up with last week’s gains. It remains the most risk that’s been priced into the market since June of 2021 when the impact of rising inflation was first being felt. It’s 22% less risk than the highs reached during the peak of the pandemic bubble. 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.