How Low Can Stocks & Crypto Currencies Go? – June 3rd, 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 from record highs – down 1% last week
- S&P 500: >1% from highs – off marginally last week
- Nasdaq: >1% from high – off about 1% last week
The big question during last week’s abbreviated trading week was what now? Following Nvidia's earnings, and being between inflation events while major indexes had set a series of record highs – what's next? The answer was that for much of the week investors did a little profit taking. But then on Friday one of the inflation gauges the Federal Reserve tracks – the Consumer Expenditures Index came in as expected reflecting a 2.8% increase in consumer expenditures over the past year which led to a Friday rally for the Dow specifically as it posted its best day of the year (despite still trading lower for the week). The week figures to have more volatility instore as more traders will be working, we’ll have a full trading week, and we’ll receive the monthly jobs report data as well. Buckle up... As for cryptos...
Following a big week in the digital currency space in the previous week, as the SEC gave the green light to ether ETF’s, making the digital currency the second in the space to have an investment vehicle designed to make it easier to purchase a stake in the digital currency, last week digital currencies took a breather. Bitcoin is flat over the past week trading at around $68,000. Ethereum which had its best week in a year on back of its ETF news in the previous week lost over $100 on the week to trade back above $3,800. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, closed down about 3% on the week. 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: 27.43
- S&P 500 avg. PE: 16.07
The downside risk is 41% based on earnings multiples right now from current levels. That’s a little lower over the past week as prices dropped slightly while fundamentals were static. We currently 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.