How Low Can Stocks & Crypto Currencies Go? – April 15th, 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: 5% away
- S&P 500: 3% away
- Nasdaq: 2% away
It was the worst week for the S&P 500 since January last week as stocks sold off across the board. Another way of looking at what happened...stock prices have begun to reflect reality. Last week my summary as to what would happen next was this: The quandary that investors face as we’ll soon enter the second quarter earnings reporting season is likely to produce company specific stories playing out as earnings are reported with the potential for a market that incrementally corrects. It’s hard to see how corporate earnings can be great without inflation also being a persistent problem. Anything is possible in terms of market action over the short term, however in the end, fundamentals do win out. As we saw last week inflation is most certainly a persistent problem. The CPI and PPI reports reflecting the change in consumer and producer prices confirmed an inflation reacceleration trend for the first quarter of the year. As we are now three full years into a historically high inflation cycle, there’s no end to it in sight, which also means there’s no end to the highest interest rates we’ve had in over twenty years in sight either. What’s more is the continued and ramped up geopolitical instability, which now includes Iran’s direct attack of Israel, serves to further disrupt supply chains which could serve to add to inflationary pressures – especially oil prices.
Entering this year investors had bet on a minimum of three interest rate decreases during the year with some expecting as many as seven. After last week’s inflation report the expected range is now 0 to 2. I still hold open the possibility that the Federal Reserve may need to raise interest rates further before all is said and done. As I see it there are only three ways out of the current cycle. 1) Significant policy changes on inflationary border and spending policies 2) Additional interest rate increases 3) A recession. Earnings season did kick off late in the week last week. Companies that don’t deliver outstanding results are likely to be punished significantly amid what I still believe is likely a correction cycle (a decline of 10% or more). As for cryptos...
For the fourth week out of five digital currencies traded lower including significant selloffs straight through the weekend. Bitcoin ripped lower by close to $6,000 and is now back to the correction levels of over three weeks ago around $64,000. Ethereum’s losses were even more pronounced with a decline of close to $400 for the lowest price in about two months at just over $3,000. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 4% on the week, however it didn’t trade over the weekend and is likely to open significantly lower today. There’s a risk off trade that’s starting to play out in digital currencies as concerns about what may happen next in the middle east and with the economy started to lead to investors moving money out of cryptos and onto the sidelines.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 27.81
- S&P 500 avg. PE: 16.06
The downside risk is 42% based on earnings multiples right now from current levels. That’s a bit lower than last week due to stocks trading lower, though it remains 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.