How Low Can Stocks & Crypto Currencies Go? – August 12th, 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: off about 1% last week, 4% away from record high
- S&P 500: slightly lower for the week, 6% away from record high
- Nasdaq: slightly lower for the week, 11% away from record high
If all you did was look at the major averages over the weekend you wouldn’t have thought much happened last week with the major indexes all only slightly lower for the week. The getting there was adventurous. The S&P 500 hit correction territory in premarket trading last Monday joining the tech-heavy Nasdaq in the process. The week featured the worst trading days in two years in multiple indexes followed by the best day in about two years later in the week while most of the losses were recovered. It proved to be the most volatile week of the year as the VIX, that measures volatility in the market, spiked to its highest level in four years during the peak of selling early last week.
The week did feature JP Morgan raising their recession risk probability to 35% but it also featured a weekly jobless claims number that was far better than the previous weeks’ report and that helped to calm nerves in the market – at least temporarily. The bottom line as of now is that most investors are betting on a recession being averted and the Federal Reserve’s anticipated cutting of interest rates acting as a tailwind. We’ll see if that holds up this week as critical economic reports will roll in – none more important than the monthly CPI report on Wednesday. Expect more volatility this week.
Through Friday 91% of the S&P 500 had reported earnings with growth averaging 10.8% year-over-year, which is lower than a week ago as earnings season is ending on a slightly disappointing note though overall earnings growth did prove to be the highest since the 4th Quarter of 2021.
Similar to stocks, volatility was the name of the game with digital currencies last week. After trading below $50k Bitcoin was flat by the end of the week to trade around $60,000. Ethereum lost about $300 during the week to trade near $2,600. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost about 6% 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: 27.92
- S&P 500 avg. PE: 16.08
The downside risk is 42% based on earnings multiples right now from current levels. That’s flat over the past week as fundamentals and stock prices were slightly 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.