How Low Can Stocks & Crypto Currencies Go? – July 15th, 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: record high
- S&P 500: record high
- Nasdaq: record high (reached during the week)
Positive news on inflation along with a solid start to the second quarter earnings season have led to a series of new highs for stocks and the momentum trade has continued but also importantly if there’s to be staying power within the rally – the breadth of the gains has extended to stocks and sectors previously left out of the mix. Specifically, many mid-and smaller cap companies. That’s an especially encouraging development for the market. Notably, while the inflation news continues to be positive in trend, the reporting around it is often misleading.
Last week’s Consumer Price Index Report did not in fact show declining inflation but rather a continuation in the trend of lower inflation increases. Consumer inflation is still running at 3% year-over-year as of the most recent reporting, which is still a full point above the Federal Reserve’s target rate of 2% meaning it’s still too early to expect a decrease in interest rates. As for earnings...
Through Friday, 5% of companies had reported for the current quarter and earnings have surged so far. For those who’ve reported, earnings have grown 9.3% year-over-year for the best growth since the first quarter of 2022. This is extremely important to help justify elevated stock prices. As for cryptos...
Digital currencies have not enjoyed the recent success that stocks have seen. Bitcoin remains below $60,000. Ethereum has given back all of the gains posted following the SEC’s decision to allow Ether ETFs as it sits under $3,200. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, and that has performed better than the leaders of late is still off about 13% from highs reached earlier this year. The bottom line is that the expansion of investment vehicles for cryptos hasn’t meaningfully led to luring in a new crop of investors. 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: 29.34
- S&P 500 avg. PE: 16.08
The downside risk is 45% based on earnings multiples right now from current levels. That’s 2% higher over the past two weeks 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.