How Low Can Stocks & Crypto Currencies Go? – September 9th, 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 3% last week, 3% away from record highs
- S&P 500: lost 4% last week, 5% away from record high
- Nasdaq: lost 5% last week, 11% away from record high
What a difference a week made in the stock market as significant selling ensued following two concerning jobs reports (ADP & BLS) which showed far fewer jobs being added than is needed to keep pace with population growth for a second consecutive month. For the S&P 500 it was the worst week in a year. For the Nasdaq it was the worst week in two years and the tech heavy index has reentered correction territory (a decline of 10% or more from highs) ...and yet the jobs reports and the price action for stocks felt highly predictable heading in the week.
The bottom line is that stocks had been priced for perfection, a 25-basis point interest rate cut by the Federal Reserve had already been priced into stocks for September, and there were several indications that the labor market has been weakening and that last month’s reports weren’t outliers. Also working against stocks is seasonality. September and October have historically been the two worst months of the year for stocks. So here we are. What will happen this week? Purgatory until the Fed’s policy meeting next week. The biggest market mover might be the outcome of Tuesday night’s presidential debate. As for cryptos...
What was bad for tech stocks was once again worse for digital currencies which continue to trade in lock step with the Nasdaq but with commonly exaggerated moves. Bitcoin was off about 4k to $54,000. Ethereum likewise was lower dropping about $200 to trade around $2,300. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost over 11% on the week. Gold remains near record highs. 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: 28.26
- S&P 500 avg. PE: 16.09
The downside risk is 43% based on earnings multiples right now from current levels. That’s three percent lower over the past week as fundamentals were slightly lower but with stock prices dropped faster than fundamentals. We currently have a cycle 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.