How Low Can Stocks & Crypto Currencies Go? – June 24th, 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 2% last week
- S&P 500: Hit a new record high during the week – up 1% last week
- Nasdaq: Hit a new record high during the week – up >1% last week
Momentum was still behind the market as all major indexes were higher again last week with the S&P 500 and Nasdaq touching new highs once again within it. The leader though was the DOW, which has been lagging the performance of the other two of late. The DOW had its best week in over a month as something began to come into focus late in the week. Sector rotation. The first half of this year has been dominated by AI darling Nvidia and all of the related AI plays. Late in the week we began to see selling in Nvidia & co. while value plays began to catch some traction. Was it a brief aberration led by traders taking profits in the world’s most valuable company (which had become Nvidia) or is it the start of something more at the onset of the summer? By any reasonable measure the AI plays are historically expensive as are markets generally. This dynamic will be one worth watching this week to see if there’s follow through with what we saw late last week. As for cryptos...
Digitial currencies were lower across the board for the second straight week as we’ve continued to see decoupling with the trading activity of cryptos and tech stock plays. On that note one firm, Stifel, believes that the recent correction in cryptos is foretelling a coming correction in the tech-heavy Nasdaq. Many have called for a correction in the first half of this year, myself included, and at one point we came close to correction territory, and it never came. Maybe this will prove to be a head fake once again, however the analyst’s call notes the tight trading pattern between digital currencies and the Nasdaq as a sign that the correction really might happen this time. We shall see...
Bitcoin dropped another two thousand dollars in value to trade at around $64,000. Ethereum, recently buoyed by the SEC’s decision to allow Ether ETFs was off slightly on the week to trade just under $3,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 4% 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: 28.40
- 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 slightly with similar fundamentals. 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.