How Low Can Stocks & Crypto Currencies Go? – February 20th, 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: Within 1% of record high
- Nasdaq: Within 2% of record high
All good runs must come to an end at some point and for investors, the impressive five-week winning streak for stocks came to a close last week. The major averages broke lower following hotter than expected consumer and wholesale prices in January. Both the CPI and PPI showed a reacceleration of inflation to start the year, at annualized rates of 3.1% for consumer prices and 2.6% for producer prices – well ahead of the Federal Reserve’s target rate of 2%. This provided a crystal-clear indication that interest rate cuts won’t be starting in March and moreover, may be off the table for the foreseeable. While I believed this was always the most likely scenario, many investors bought into the narrative of rate cuts early this year as a justification for stock prices that have far outpaced fundamentals during the current course of the rally. Speaking of fundamentals...
Through Friday 79%, of all companies had reported earnings. It was another good week of reported results. A week ago, earnings for companies showed 2.9% growth for the quarter. After last week’s reporting that’s jumped to 3.2%. Continued earnings growth is critical as earnings season soon concludes to help support stock prices. As for cryptos...
It was another big week for digital currencies, especially bitcoin, as it hit multi-year highs back above $52,000 – adding over $5,000 on the week for the second straight week – reclaiming a trillion-dollar market capitalization in the process. This has come as leaked documents show that the Biden administration, in conjunction with senior Democrats, are planning a centralized digital dollar. Ethereum gained over $400 in the week to sit back above $2,900. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, posted a gain for a fourth 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: 27.17
- S&P 500 avg. PE: 16.05
The downside risk is 41% based on earnings multiples right now from current levels. That’s flat with a week ago. It remains 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.