How Low Can Stocks & Crypto Currencies Go? – June 10th, 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: 2% away from record highs – up >1% last week
- S&P 500: record high – up 1% last week
- Nasdaq: >1% from high – up 2% last week
The S&P 500 and Nasdaq touched new highs yet again as the market melt up continued last week. The rally continued to be led by the usual suspects – Nvidia and related AI tech stock plays. Key to the market’s storyline is the continued economic news flow. With optimism running high in the markets many investors have taken the glass half full approach to economic news. This was on display again on Friday with the monthly jobs report. The jobs report came in hotter than expected with 272,000 initially reported jobs having been added in May. Given the interest rate sensitivity of investors who remain in a constant state of Fed watch, that type of information would have typically triggered a strong selloff due to concerns that interest rates will continue to remain higher for longer. The major indexes did close slightly lower on Friday on the news, although only after having rallied for much of it. The reason there wasn’t a larger selloff was due to many investors seeing what they wanted to see in the report. Despite the stronger than expected job gains, the unemployment rate ticked up to 4% - that’s the first time the unemployment rate has been 4% or higher in nearly two and a half years (January of 2022). The unemployment rate has slowly but steadily risen since last July when the unemployment rate bottomed out at 3.5%. This has some investors feeling as though the Fed will perhaps be able to cut rates starting in September. I personally doubt it but we shall see. The biggest market moving news this week will be the monthly inflation report. The Consumer Price Index will drop Wednesday morning. As for cryptos...
The past week has been a mixed bag for digital currencies. Bitcoin added just over a thousand dollars in value over the past week to trade at around $69,000. Ethereum, recently buoyed by the SEC’s decision to allow Ether ETFs sold off by about $150 on the week to trade near $3,600. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was slightly higher 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: 27.79
- S&P 500 avg. PE: 16.07
The downside risk is 43% based on earnings multiples right now from current levels. That’s higher over the past week as prices rose 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.