Photo: Getty Images
Stock Market & Crypto Currency Update – May 16th, 2022
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. I want you to benefit without making emotional mistakes with money.
Here's how the Dow, S&P 500 & Nasdaq have performed year-to-date:
- DOW: -11% YTD
- S&P 500: -16% YTD
- Nasdaq: -25% YTD
The brutal selloff in stocks continued last week. As has been the case since last fall, the selling has been steepest with the former pandemic high-flyers. The saying, the higher you fly, the harder you fall has very much applied to the market over the past six months. This weekly analysis, which I’ve provided weekly since the onset of the Great Recession nearly fifteen years ago, has always come back to one theme. Fundamentals. With stocks, sooner or later it always comes back to fundamentals. Companies that rapidly increase sales but lose money doing it, can only get away with that for so long. Companies that turn a profit but are treated as though they’ll grow like a weed forever, likewise, can only get away with that for so long. What we’ve had happening is a reckoning within the stock market. Unprofitable weeds have been whacked and profitable trees that were priced with weed-like growth have been reclassified and valued accordingly. It might not feel like it while it's happening, but this is a healthy process. Companies valued with bubble-like valuations wasn’t healthy.
Recently I’ve mentioned that the bursting of the pandemic tech bubble felt a lot like the bursting of the dot com bubble in 2000. The similarities are many. Low unemployment. Money chasing ideas bidding unprofitable companies up to absurd valuations. The Fed raising interest rates aggressively to combat inflation. History tends to repeat itself. And if history does, the story ends with a recession. Which, with first quarter economic growth already having contracted – we're already halfway there. And now, as we’re now halfway through the second quarter, does the economy seem better to you? Stocks are leading indicators and it’d be a borderline miracle for the economy to experience 41-year high inflation, the Federal Reserve aggressively raising rates to combat it, a bear market for stocks, mortgage rates doubling to reach 13-year highs and yet somehow expect everything to come out sunshine and lollipops. That doesn’t mean it’s all bad news for stocks from here. Certain, highly profitable names with great fundamentals and nice dividends will continue to perform – and many have through the recent adversity. That said, the headwinds are many, and as I pointed out on Friday, as high as inflation has been for us, companies have been eating 2.7% more of it for us, than what they’ve passed along. That showed up during earnings season with their warnings about the rest of the year. 85% of companies cited inflation as an issue going forward.
Like high-flying tech stocks, cryptos have continued their post-fall crash. They were crushed again last week. The Bitwise ETF, which represents the top 10 cryptocurrencies, has fallen a staggering 76% from last year’s highs. The top two players, Bitcoin and Ethereum, have held up better than most but sold off hard again last week. Bitcoin is 65% off its record high – managing to climb back above $30,000 this weekend. with Ethereum the best relative performer as it sits 57% from last fall’s record high. There’s no way to provide analytical valuations for cryptos as there is for stocks. It’s important to note that these have been willed into existence and while there’s real value to blockchain technology, the cryptocurrencies themselves retain no inherent value. They’re worth what someone is willing to pay for them. As for stock valuations...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 20.34
- S&P 500 avg. P\E: 15.97
The downside risk is 21% based on earnings multiples right now from current levels. That’s 2% less risk than a week ago and 34% less risk than the highs reached last year. The fundamental value for stocks is currently the best since 2015. This isn’t to say there isn’t more downside from here, however we’re now seeing good value opportunities in this market. The combination of improved earnings and lower stock prices has generally led to a better value proposition for investors. It's always important to ensure that you're positioned for negative adversity. I don’t expect anywhere near an additional 21% decline, however in theory it’s possible if the near worst case outcomes occurred. 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 long term objectives.