How Low Can Stocks & Crypto Currencies Go? – May 6th, 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: 3% away – up 1% last week
- S&P 500: 2% away - up 1% last week
- Nasdaq: 2% away – up 1% last week
There’s nothing like a weaker than expected jobs report these days to make investors feel better about buying stocks. Sure, it seems like an oxymoron, but what last week’s price action for stocks, including the feverish rally on Friday following the weaker than expected jobs report – showed, is that market sentiment is still tied to interest rate policy (and the perception of what that will be based upon an economic data point at any given time).
Last week was certainly a busy week for investors as we remained in the thick of earnings season, had the Federal Reserve’s interest rate policy decision (which was to leave rates unchanged as expected), and Friday’s jobs report. Earnings have been pretty good. The Fed didn’t offer up any unwanted surprises. The jobs report was weaker than expected. Let’s dive in.
175,000 jobs were added last month – well below the 240k expected and the weakest in many months. The result of the weak jobs report is that market economists revised forecasts from an average of one rate cut to interest rates this year, to two. So that’s what led to Friday’s rally. As for earnings... Through Friday 80% of companies had reported earnings for the current reporting season. 77% of companies have topped expectations and earnings growth is now pacing 5% year-over year – that's a 1.5% improvement over a week ago and the best in two years. The meaningful earnings improvement helps explain and justify, to a certain extent, last week’s rally. The qualification is due to the still historically high stock valuations. Stocks remain priced 5% to 13% above their 5- and 10- year trends. A still stronger finish to the earnings season than we’ve seen, at the start could alter that math a little, however on a backward-looking or forward-looking basis the market is still priced at historically high levels. As for cryptos...
What started off as a rough ride for digital currencies including selloffs by midweek that placed tokens at three-month lows, they bounced back by the end of the week along with stock market sentiment as well to end mostly flat. This shows they’re still largely tied to risk sentiment in the stock market. Bitcoin was flat on the week sitting above $63,000. Ethereum lost around $100 on the week to trade above $3,100. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 10% on the week and is sitting at two-month lows. I can’t provide value analysis for digital currencies because they retain no inherent value, but I can for stocks because they do. On that note...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 27.83
- S&P 500 avg. PE: 16.06
The downside risk is 42% based on earnings multiples right now from current levels. That’s flat with last week as a modest improvement in fundamentals kept up with rising stock prices. However, stocks have 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.
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.