How Low Can Stocks & Crypto Currencies Go? – March 18th, 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. 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: 1% from All-time high
- S&P 500: 1% from All-time high
- Nasdaq: 2% from All-time high
Following a rally led by the AI tech boom in recent months, stocks lost ground for a second straight week – though the major averages remain close to their recent all-time high levels. The economic news during the week wasn’t at all what many investors had hoped to hear as there was a double dose of less-than-ideal inflation news. Both the CPI (Consumer Price Index) and the PPI (Producer Price Index) came in hotter than expected – meaningful both consumer and producer inflation continue to pose a significant problem for affordability in society. Notably, there’s been a reacceleration in the already historically high rate of inflation through the first two months of the year. This not only creates ongoing affordability challenges for the average family, but it also ensures that the Federal Reserve will not be cutting interest rates as it meets this week to discuss monetary policy. The key bit of economic information to watch this week isn’t the Fed’s decision, but specifically their forward-looking commentary. With consumer inflation most recently 1.2% higher than their target rate and rising – there’s the potential the Fed’s commentary could push back any expectations for rate cuts for the foreseeable. Market valuations are stretched, and the market is ripe for a correction. That’s worth watching this week following the light selloff over the previous two weeks.
As for cryptos...
After having set new records of their own on the back of a feverish rally following favorable regulatory news, digital currencies have already entered correction mode. After peaking near $74,000 recently, bitcoin has given up close to $8,000 over the past week. Similarly, Ethereum broke above $4k but has most recently retreated to around $3,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 5% on the week (which proved to be the best performer of the bunch). 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: 27.77
- S&P 500 avg. PE: 16.06
The downside risk is 42% based on earnings multiples right now from current levels. That’s roughly 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 20% 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.