How Low Can Stocks & Crypto Currencies Go? – March 25th, 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: Within 1%
- S&P 500: Within 1%
- Nasdaq: All-time high
What another week it was for stocks as investors continued to bid the major indexes up to new highs yet again following the Federal Reserve’s monetary policy meeting. As was expected the Fed left interest rates unchanged. What led to another round of bullishness in the markets was the Fed’s commentary holding open the possibility for three rate cuts this year – unchanged from the previous meeting. This was notable given the most recent inflation data on the consumer and producer side came in hotter than expected. All told, stocks had their best week of the year which wraps up the first quarter of trading this week. That was despite a DOW selloff on Friday and a slight decline in the S&P 500.
Without planned major catalysts on the economic calendar this week – it's one to watch for in terms of near-term direction. The stock market’s remarkable rally over the past 5+ months has led stocks to frothy valuations. Will momentum hold or will there be a bit of profit taking? I’ve been anticipating a near term correction for a couple of months as valuations have become stretched to historically high levels. It hasn’t happened. It may not happen. But this week is one to watch in that regard. As for cryptos...
The digital currency correction extended through a second week last week with bitcoin trading sideways to lower with the current price – near $65k about $9,000 off of recent highs. Similarly, Ethereum broke above $4k but has most recently retreated below $3,400. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was flat on the week and has been the best performer over the past two weeks – as second and third tier digital currencies have held up a bit better than the leaders during the correction. 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: 28.41
- S&P 500 avg. PE: 16.06
The downside risk is 43% 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 19% 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.