How Low Can Stocks & Crypto Currencies Go? November 25th, 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.
Let’s start with a look at the DOW, S&P 500 & Nasdaq.
- DOW: +2% last week (>1% from a record high)
- S&P 500: +2% last week (>1% from a record high)
- Nasdaq: +2% last week (2% away from a record high)
After taking a breather for a week following the massive post-election rally, it was off to the races for stocks once again as optimism about the incoming Trump-administration continues to reign supreme. With that said, sector rotation that took place as many high-flying and richly valued tech stocks, a la Nvidia (despite another stellar earnings report), saw selling by the end of the week and many sectors tied directly to the US consumer performed best.
While the incoming Trump administration means a significantly improved regulatory environment for all companies that at a minimum will likely quickly eliminate 970 new business regulations imposed by the Biden administration that came at a cost of $1.7 trillion), there is a mixed outlook for many American multi-nationals that will need to sort through what potential tariffs will be and the resulting impact on their businesses. This week ushers a window of time that tends to be the most favorable of the year for stocks. With what’s often referred to as a ‘Santa Claus rally’, playing out. Will that prove to be the case yet again this year? That’s unclear given the remarkable gains we’ve seen. Seasonality could win out, especially with many investors carrying large gains into year end. Investors may opt to take profits in January when they wouldn’t have to pay capital gains on those gains until April of 2026. As for cryptos...
The Trump Train rally with digital currencies, especially bitcoin, has remained full speed ahead since Election Day. Nowhere are regulatory changes expected to have a greater impact than with cryptos. The general belief remains that Donald Trump, a crypto advocate, will eliminate regulatory headwinds facing the industry. Bitcoin gained another $6,000 to trade above $97,000 for a new record. There’s been a general belief that it’s not a question as to if $100,000 will happen but how quickly it will get there. It could happen any day now – though the crypto market is heavily leveraged currently and is ripe for a sharp correction is selling ensues. A milestone number, $100,000 could prove to be a sell the news event...though the same tax considerations as mentioned with stocks do apply. It’s possible many digital currencies investors carrying gains wait until the new year to sell for tax considerations.
Ether gained about $200 on the week to trade above $3,300. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies ran up about 6% for the week and has gained close to 70% following the election results.
Gold, meanwhile, had its best week in about two years tracking back to trade above $2,700 an ounce once again as some investors are seeking diversification and safety amid pricey assets and geopolitical turmoil with Russia lowering the threshold for use of nuclear weapons following President Biden’s decision to allow US weapons for use by Ukraine in Russia’s interior. 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: 30.52
- S&P 500 avg. PE: 16.10
The downside risk is 47% based on earnings multiples right now from current levels. That’s 1% higher than a week ago as fundamentals were static, and stocks were higher. 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.