How Low Can Stocks & Crypto Currencies Go? – August 5th, 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: lost 2% for the week, 4% away from record high
- S&P 500: lost 2% last week, 6% away from record high
- Nasdaq: lost 4% last week, 11% away from record high
There was no head fake this time the correction has arrived for the tech heavy Nasdaq. Twice earlier this year the Nasdaq, which has led the stock market rally this year on the back of the AI boom, threatened to enter correction territory, a decline of 10% of more, this time it happened and the biggest question entering this week is whether it remains a correction, or if there’s the potential for a bear market, a decline of 20% or more, to occur.
Last week brought about the perfect storm of economic data. First there was the ADP Report showing job growth came in considerably weaker than expected with an outright decline in small business jobs for the month – a troubling economic indicator historically. Next, we had the weekly unemployment claims that were the highest in exactly a year. Then we had the Manufacturing ISM report that became a data bomb in the financial markets. The ISM for July showed a recessionary level of manufacturing activity for the month. The monthly number was the worst since COVID lockdowns, and prior to the pandemic, the previous time we had such a weak read was in early 2010 during the Great Recession. But that wasn’t all – Friday we received a brutal jobs report that largely mirrored the ADP Report but once again showed massive negative revisions from prior months, a theme that’s played out for the government time and again as it initial jobs gains report by the government have highly overstated in all but one month over the prior year. This week is an especially important one for the markets as we head down the home stretch of earnings season.
Through Friday 75% of the S&P 500 had reported earnings with growth averaging 11.5% year-over-year, which is higher than a week ago and the highest since the 4th Quarter of 2021. This earnings improvement helps to justify elevated stock prices as the market broadly has been historically expensive.
The tech wreck extended to digital currencies last week. Bitcoin performed well, almost all others didn’t. Bitcoin lost $8,000 during the week to trade around $60,000. Ethereum lost over $300 during the week to trade near $2,900. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost about 7% 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: 27.94
- S&P 500 avg. PE: 16.08
The downside risk is 42% based on earnings multiples right now from current levels. That’s 2% lower over the past week as fundamentals were steady and stock prices were lower. 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.