How Low Can Stocks & Crypto Currencies Go? – August 26th, 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 1% last week, new record high during the week
- S&P 500: rose 1% last week, 1% away from record high
- Nasdaq: rose 1% last week, 5% away from record high
Investors betting on a Federal Reserve interest rate cut got exactly what they wanted on Friday as Fed Chairman Jerome Powell said: The time has come for policy to adjust. That took all remaining doubt about a potential interest rate cut in September off of the table. In reality, institutional investors had already priced in a 100% chance of a rate cut in September following the spate of economically weak news a few weeks ago. Nevertheless, the confirmation that the end of the current high interest cycle is set to switch gears led to a strong relief rally in equities on Friday. The confirmation also increased the number of investors who now think that the forthcoming rate cut will be a half-point as opposed to a quarter-point. Powell was less comitial in his comments in that regard saying... The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.
Questions now will loom about what direction the market goes from here having already priced in the rate cuts. The biggest market moving news this week is likely to be Nvidia's earnings announcement on Wednesday. Another phenomenal report with equally outstanding guidance will be needed to keep the tech rally’s train, led by Nvidia, on track. As for cryptos...
Digital currencies had a good week as well as Bitcoin added around 5% to reach $63,000. Ethereum likewise was higher adding about $150 to trade at $2,750. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies gained just over 4% on the week. One note about cryptos... They continue to trade in a similar pattern to the tech heavy Nasdaq as opposed to a gold alternative. Gold reached new record highs at $2,550 per ounce on the back of the Fed commentary. Cryptos are near the higher end of their trading range but still well off of highs. 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: 29.44
- S&P 500 avg. PE: 16.08
The downside risk is 45% based on earnings multiples right now from current levels. That’s flat over the past week as fundamentals slightly improved but with stock prices rising similarly. 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.