How Low Can Stocks & Crypto Currencies Go? January 6th, 2025

How Low Can Stocks & Crypto Currencies Go? January 6th, 2025 

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 how the DOW, S&P 500 & Nasdaq have performed so far in the new year: 

  • DOW: +1% 
  • S&P 500: +1%  
  • Nasdaq: +2% 

After a little selling to end what was another incredible year for the stock market, the second in a row in which the S&P 500 posted gains of over 20%, we’ve seen buying to start the new year once again as optimism about the incoming Trump administration continues to reign supreme. The incoming Trump administration will bring a significantly improved regulatory environment for companies. It's expected the incoming administration will quickly eliminate 970 new business regulations imposed by the Biden administration that came at a cost of $1.7 trillion.  

Something that’s worth watching however is sentiment heading into earnings season. According to FactSet, among S&P 500 companies that have updated earnings guidance, two-thirds, or 67% of those revisions have been negative. Stocks are already historically expensive and unexpected earnings erosion could prove to be a fly in the ointment for hopes of a continued rally in the early months of 2025. Also, another potential headwind could be investors sitting on big gains from the previous year selling positions now that capital gains taxes on those gains won’t be due until April of 2026. 

As for cryptos...  

The Trump Train rally with digital currencies continued to start the year. Yes, tokens are off of their recent highs, however the gains remain biggest in this space. 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. Year-to-date Bitcoin has risen by 4% (after more than doubling in value last year). Ether has gained 8% in the young year. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, is slightly lower after having been the biggest winner of 2024. Similar to stocks, it's possible many digital currencies investors carrying gains wait until the new year to sell for tax considerations. 

Gold, meanwhile, has gained a bit over the past week as well trading at $2,652 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: 30.33 
  • S&P 500 avg. PE: 16.12                                                             

The downside risk is 47% based on earnings multiples right now from current levels – flat with a week ago.  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. 


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