How Low Can Stocks & Crypto Currencies Go? – June 17th, 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: 4% away from record highs – down >1% last week
- S&P 500: Hit a new record high during the week – up 2% last week
- Nasdaq: Hit a new record high during the week – up 3% last week
The momentum train continued chugging last week for the S&P 500 and Nasdaq as they touched new highs yet again. The DOW has been and was the outlier last week as speculation builds that AI darling Nvidia could replace Intel in the DOW Jones Industrial Index. Speaking of which...
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. Last week’s CPI and PPI reports showed a moderation in inflation, providing increased optimism that an interest rate cut or two could still be on the table this year. Speaking of which, the Federal Reserve essentially laid out guidance accordingly in their policy meeting last week. The economic news flow wasn’t all good for those looking for a soft landing from the era of historically high inflation and interest rates. Friday’s monthly consumer survey found Americans are rapidly losing confidence in the economy and their ability to participate in it. If consumer spending were to follow the pattern of the sentiment survey it could increase the risk of entering a recession this year – especially since the revised 1st quarter growth rate for the US economy was barely positive at just 1.3% As for cryptos...
Digital currencies were lower across the board over the past week. Bitcoin dropped just over two thousand dollars in value to trade at around $66,000. Ethereum, recently buoyed by the SEC’s decision to allow Ether ETFs sold off by about $50 on the week to trade near $3,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 8% 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: 28.23
- S&P 500 avg. PE: 16.07
The downside risk is 43% based on earnings multiples right now from current levels. That’s flat over the past week as stock prices rose with fundamentals slightly improved as well. 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.