How Low Can Stocks & Crypto Currencies Go? September 30th, 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: Slightly higher last week, set a new record high
- S&P 500: Slightly higher last week, set a new record high
- Nasdaq: gained 1% last week, 2% away from record high
The incredible stock market melt up continued last week following the Federal Reserve’s decision to cut interest rates by a half-point the previous week. A key contributor to keeping the good vibes going on Wall Street had to do with the PCE, or Personal Consumer Expenditures index (a fancy way of saying how much more we spent on stuff year-over-year) rose by 2.2% which was lower than expectations and yet another inflation metric watched by the Fed that’s trending towards their 2% target rate.
The market is super pricey at current levels, but then again it has been most of this year and has continued higher with only a brief tech correction here and there. Can that continue as we head into October? A lot of investors will be wondering. It’s likely that this week’s two key jobs reports, the ADP Private Sector Report and especially the government’s jobs report on Friday will have a lot to say about it. The prior two months have produced especially weak results. 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 $65,000. Ethereum likewise was higher, rising about $150 to trade above $2,600. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies gained 4% in the week. Gold meanwhile continues to be the steadiest asset as it hit yet another new high as it neared $2,700 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: 29.94
- S&P 500 avg. PE: 16.09
The downside risk is 46% based on earnings multiples right now from current levels. That’s flat over the past week as fundamentals and stock prices both slightly improved. 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.