How Low Can Stocks & Crypto Currencies Go? October 28th, 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: -3% last week, 3% away from record high
- S&P 500: -1%, 1% away from record high
- Nasdaq: slightly higher, set a new record high
It was a mixed market last week with tech stocks performing the best as earnings season rolled along during the homestretch of this year’s election cycle. The six-week winning streak for the DOW & S&P was snapped as investor’s have mostly priced in an expectation of a Trump win a week from Tuesday. This week figures to see more of the same as investors look for direction awaiting the election results as earnings season will also see most companies having reported earnings by the conclusion of it.
Through Friday, 37% of companies had reported earnings for the third quarter. 75% of companies reporting had topped expectations with earnings growth of 3.5% year-over-year which is pacing lower than what we’ve seen in recent quarters and would be the lowest in two years if it held. As for cryptos...
After a big rally in the previous week, cryptos took a pause last week. Bitcoin lost over $1,000 to trade near $67,000. Ethereum lost $150+ to trade back below $2,500. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost about 2% for the week.
Gold meanwhile remained in record territory above $2,740 an ounce. 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: 29.65
- S&P 500 avg. PE: 16.10
The downside risk is 46% based on earnings multiples right now from current levels. That’s flat with a week ago as fundamentals and stock prices moved similarly. 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.