How Low Can Stocks & Crypto Currency Go? – February 12th, 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: Within 1% of record high
- S&P 500: Record high
- Nasdaq: Within 1% of record high
It was a fifth straight winning week for stocks with fresh record highs for the DOW and S&P 500 during the week including the S&P 500 closing out Friday above 5,000 for the first time ever. A “good enough”, in the eyes of most investors, earnings season continued to roll along as inflation fears continued to abate. That was highlighted on Friday with a revised December inflation report showing inflation rose at an annualized rate of 2.7% for the month, which was slightly lower than the initial number reported. As stock prices continue to accelerate, there’s more pressure from a fundamental perspective on earnings to justify prices.
Through Friday two-thirds, 67%, of all companies had reported earnings. Notably, it was another good week of reported results. A week ago, earnings for companies showed 1.6% growth for the quarter. After last week’s reporting that’s jumped to 2.9%. Continued earnings growth is critical as earnings season soon concludes to help support stock prices following the massive four-month rally that’s played out. As for cryptos...
It was a big week for digital currencies, especially bitcoin as it hit its highest price since early January and is essentially sitting at two-year highs above $48,000 – adding over $5,000 on the week. Ethereum hasn’t performed quite as well, having yet to reach a new high for the year, however it gained over $200 in the week to sit back above $2,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, posted a gain for a third straight week. The reason for the gains is a general belief that selling pressure, brought about by investors leaving digital currency backed ETFs, is starting to dry up. 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: 27.28
- S&P 500 avg. PE: 16.04
The downside risk is 41% based on earnings multiples right now from current levels. That’s higher than a week ago with stock prices rising faster than fundamentals. It’s the most fundamental risk that’s been priced into the market since June of 2021 when the impact of rising inflation was first being felt. It’s 21% less risk than the highs reached during the peak of the pandemic bubble. The bottom line is that the market is somewhat historically expensive at these levels. Still, 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.