How Low Can Stocks & Crypto Currencies Go? September 16th, 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 2% last week, 1% away from record highs
- S&P 500: gained 3% last week, 2% away from record high
- Nasdaq: gained 5% last week, 6% away from record high
What a difference a week made yet again in the in the stock market as significant as we went from having the worst week of the year during the previous week only to have the best week of the year last week. What was behind the sudden sentiment shift? That’s a good question. Yes, the CPI was released during the week with year-year-year inflation coming in at 2.5% as expected. It was a number that’s still higher than the Fed’s 2% target rate but also a number that kept the expectations for the Fed cutting interest rate this week intact. The presidential debate was also in focus last week as investors weigh how this election is going to go and what the impact will be for the economy, for businesses and for investors. But yes, after nearly a year of anticipation this is the week many investors have been waiting for...
The Federal Reserve meets this week to decide what changes to make with interest rate policy. After an extended period of the highest interest rates in over two decades the Fed will cut interest rates. The biggest question is by how much? According to the CME FedWatch tracker, investors have priced in a 100% chance of a rate cut with an equal split between those banking on a 25-basis point, or a quarter of a percent cut and investors banking on a 50-basis point or a half point cut. If I were a betting man, and I am not, I’d lean on a quarter point cut over an aggressive half point cut out of the gate. The last thing the Fed wants to do is to stir up inflation quickly again and the more aggressive they are in cutting interest rates, the greater the chance there is of this happening. I also wouldn’t be surprised to see markets lower a week from now compared to where they sit today. Stay tuned. It’s set to be another super volatile week. As for cryptos...
Like what we’ve seen for quite some time... was good for tech stocks was once again good for digital currencies which continue to trade in lock step with the Nasdaq but with commonly exaggerated moves. Bitcoin was up about 5k to $59,000. Ethereum likewise was higher, rising about $120 to trade above $2,400. Meanwhile, the one outlier was the BitwiseETF, which represents the top 10 cryptocurrencies, which lost another 2% in the week as second tier cryptos didn’t perform as well as the leaders. Gold meanwhile continues to be the steadiest asset as it’s hit yet another new high above $2,600 an ounce. Cryptos are near the higher end of their trading range but still well off 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: 29.43
- S&P 500 avg. PE: 16.09
The downside risk is 45% based on earnings multiples right now from current levels. That’s two percent higher over the past week as fundamentals were slightly higher but with stock prices rising faster than fundamentals. We currently have a cycle with 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.