How Low Can Stocks & Crypto Currencies Go? – August 19th, 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: gained 3% last week, 1% away from record high
- S&P 500: rose 4% last week, 2% away from record high
- Nasdaq: rose 5% last week, 6% away from record high
What a week it was on Wall Street with the market collectively, and the S&P 500 specifically, having had its best week of the year. Optimism reigned supreme as the PPI (wholesale inflation) and CPI (consumer inflation) reports showed continued progress towards the Federal Reserve’s 2% target inflation rate. The inflation reports led to confidence by investors that the Federal Reserve will begin cutting interest rates in September by a minimum of 25 basis points (a quarter of one percent) with an increasing belief it could be a 50-basis point cut (a half of one percent). But the improved inflation news was only part of the story.
One of the recent economic concerns has been that the economy might be at risk of a “hard landing” or an end to the era of high inflation and interest rates with a recession. Those concerns followed a slew of weaker economic reports a couple of weeks ago. Those concerns were significantly reduced following last week’s retail sales figures, which showed consumer spending rising by more than was expected during July. With consumers making up about 70% of the US economy, it’s unlikely that the economy has already entered the early stages of a recession. The question now becomes...where to go from here? Will stocks make a run at new highs or will there be a bit of profit taking in stocks heading into a historically volatile time around the presidential election cycle?
Digital currencies were mixed over the past week as Bitcoin was flat trade around $60,000. Ethereum likewise was flat trading around $2,600. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies gained just over 1% 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: 29.02
- S&P 500 avg. PE: 16.08
The downside risk is 45% based on earnings multiples right now from current levels. That’s higher by 3% over the past week as fundamentals slightly improved but with stock prices rising much faster. 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.