How Low Can Stocks & Crypto Currencies Go? November 11th, 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: +5% last week to reach a record high
- S&P 500: +5% last week to reach a record high
- Nasdaq: +6% last week to reach a record high
Animal spirts were unleashed on Wall Street last week with the news that Donald Trump will once again become the president of the United States. The stock market had its best week of the year last week, which is the exclamation point on what had already been a super strong performance for stocks in the leadup to the election as most investors had already begun pricing in a second Trump presidency. Investor enthusiasm is running high for expected pro-growth economic policies from the incoming Trump administration, most specifically through less regulation.
Regulations tend to be opaque for the average American as typically only those directly dealing with new regulations really understand the impact. Nevertheless, the Biden administration has added 970 new business regulations at a cost of $1.7 trillion to those businesses. In other words, if all Trump were to do was to go back to the regulatory stance at the end of his administration companies would receive a tailwind of nearly $2 trillion. Now, the market was already pricy prior to the big run last week...so valuations are historically high. More on that angle in a moment. As for cryptos...
The rally in the final markets extended to digital currencies on the general belief that Donald Trump, a crypto advocate, will eliminate regulatory headwinds facing the industry. Bitcoin gained over $12,000 to trade above $80,000 and hitting a high in the process. Ethereum surged over $750 on the week to trade above $3,200 which it last touched in July. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies ran up about 22% for the week.
Gold meanwhile took a breather dropping about $50 for the week trading back below $2,700 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: 30.66
- S&P 500 avg. PE: 16.10
The downside risk is 47% based on earnings multiples right now from current levels. That’s 2% higher than a week ago as fundamentals improved, however stock prices rose faster than the improving fundamentals. We 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.