How Low Can Stocks & Crypto Currencies Go? January 27th, 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 year to date:
- DOW: +5% (+2% last week)
- S&P 500: +4% (+2% last week)
- Nasdaq: +3% (+2% last week)
Last week’s abbreviated trading week proved to be another profitable one for investors as President Trump immediately began working on his promised agenda. An agenda that includes the elimination of most of the 970 new business regulations imposed by the Biden administration that came at a cost of $1.7 trillion to American businesses during his four years in office. Optimism was already running high in the financial markets, however the immediate delivery on Trump’s key agenda items caught the attention of investors in the US and around the world – including his speech to the World Economic Forum in Davos. Helping support the optimism...earnings.
Through Friday 16% of companies had reported 4th quarter earnings. Of them 80% exceeded expectations with growth of 12.7% yoy – the best since 2021 when companies were starting to bounce back from pandemic lockdowns. This is key for helping support the historically lofty valuations of stocks.
As for cryptos...
Digital currencies took a breather after a meteoric Trump induced rally. President Trump, a crypto advocate, launched his own “Official Trump” digital currency recently as did First Lady Melania Trump under the “Melania” name. The administration has already signed an executive order for the purpose of creating a digital currency reserve for the US Treasury and has begun rolling back related regulations. Bitcoin is 11% higher for the year trading at a record above $105,000. Ether hasn’t participated the same way as it’s slightly lower on the year around $3,300. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies is now 10% higher on the year.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 30.50
- 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 as fundamentals improved faster than stock prices. 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.