How Low Can Stocks & Crypto Currencies Go? September 24th, 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, set a new record high
- S&P 500: gained 2% last week, set a new record high
- Nasdaq: gained 3% last week, 3% away from record high
Last week, as we were awaiting what the Federal Reserve’s decision on interest rates would be I’d mentioned that: 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. Well, it’s a good thing I’m not a betting man because obviously the Federal Reserve went the far more aggressive route of cutting interest rates by a half-percent, or 50 basis points. That is notable for a couple of reasons. First, most interest rate changes by the Fed, higher or lower, are quarter point moves. Second, because the inflation target of 2% still hadn’t been achieved by the time the Fed pulled the trigger (inflation is still running 2.5% higher year-over-year).
Last week’s policy decision tells you that the Federal Reserve governors are far more concerned about the risk of a recession than they are by reigniting inflation through lower borrowing costs. Of note, Federal Reserve Chairman Powell also indicated additional rate cuts of up to another half-percent are anticipated through year end. Investors bought the aggressive interest rate move as lower borrowing costs can help fuel corporate growth for many companies, time will obviously tell if the Fed’s move was the right one. As for cryptos...
Like what we’ve seen for quite some time... what 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 3k to $62,000. Ethereum likewise was higher, rising about $150 to trade above $2,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies gained 6% in the week as second tier. 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: 29.77
- S&P 500 avg. PE: 16.09
The downside risk is 46% based on earnings multiples right now from current levels. That’s one percent higher over the past week as fundamentals were flat but with stock prices rising. 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.