How Low Can Stocks & Crypto Currencies Go? – July 22nd, 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: touched a new record high once again last week
- S&P 500: lost 2% last week (3% away from highs)
- Nasdaq: lost 4% last week (6% away from highs)
The tide changed considerably in the stock market last week as earnings season got underway in earnest, the “Trump trade” picked up steam and a sector and rotation into smaller cap companies began to take place. The Nasdaq led the losses last week as the tech momentum trade dried up leaving the index closer to correction territory than news highs by the end of the week. The losses weren’t as significant for the S&P 500 however the index had its worst week in three months, meanwhile the DOW, which had been lagging in performance, managed to eke out a small gain on the week. Speaking of small – medium and small cap companies that have been overlooked in the market became attractive to investors seeking better value in a very expensive market. As for earnings...
Through Friday 14% of the S&P 500 has reported with earnings growth averaging 9.7% year-over-year – which is higher than a week ago and the highest since the 4th Quarter of 2021. If this holds or is improved upon it will help with the justification of elevated stock prices as the market broadly has recently been historically expensive. With the big news that President Biden is now out of the presidential race look for more politically driven volatility including investors reassessing the Trump trade (shifting into companies believed to be well positioned for a potential Trump presidency) as questions about who the Democrat’s nominee will be in focus. As for cryptos...
Digitial currencies had their best week in months as they benefitted from the Trump trade phenomenon during the week as there’s wide belief that a Trump administration would be more favorable from a regulatory standpoint than the Biden administration has been. Bitcoin gained nearly $7,000 on the week to trade above $66,000. Ethereum added just over $300 on the week to sit around $3,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies added about 8% on the week to close near highs from the year. 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: 28.76
- S&P 500 avg. PE: 16.08
The downside risk is 44% based on earnings multiples right now from current levels. That’s 1% lower over the past week as fundamentals slightly improved with a slight decline in stock prices. 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.