How Low Can Stocks & Crypto Currencies Go? – April 1st, 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: All-time high
- S&P 500: All-time high
- Nasdaq: Within 1%
It was the best first quarter for stocks in five years as optimism continued to reign supreme in last week’s abbreviated traded week. The S&P 500 posted a gain of just over 10% during the quarter, equivalent to the average annual return for the index. The large stock market gains can be attributed to essentially three factors. 1) The Federal Reserve holding open the possibility that there could be up to three rate cuts this year – despite a reacceleration of inflation during the quarter. 2) The AI boom which many liken to a second coming of the dot com era on Wall Street in the 90’s. 3) An absence of other places to go with money as real-estate inventory is limited and valuations are stretched there as well. Heading forward into the second quarter, and generally throughout the year, the extent to which those stories hold up will be key in determining how high (or low) stocks will eventually go. Stock market valuations have been historically high for over two months – meaning any news that impacts the narrative could be met with rapid profit taking by investors. As for cryptos...
Following a two-week correction for cryptos, digital currencies bounced back with impressive gains yet again last week. Bitcoin is back to return to a price north of $70k. Ethereum’s gains weren’t nearly as pronounced, however it added back about $200 on the week to trade above $3,600. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was flat for a second straight week as second and third tier digital currencies didn’t see the same level of follow through with the last week’s rally. 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: 28.52
- S&P 500 avg. PE: 16.06
The downside risk is 44% based on earnings multiples right now from current levels. That’s higher for the second straight week and it's the most fundamental risk that’s been priced into the market since April of 2021 when the impact of rising inflation was first being felt. For perspective, the pandemic cycle is the only time valuations have been this high over the past decade and prior to this cycle, you’d have to go back to the Great Recession in ‘08-‘09 to find prices this high on a fundamental earnings basis.
Still, current prices are 18% 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.