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Stock Market & Crypto Currency Update – May 23rd, 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: -14% YTD
- S&P 500: -18% YTD
- Nasdaq: -27% YTD
The brutal selloff in stocks continued last week as the Nasdaq and S&P 500’s consecutive week losing streak – standing at seven weeks – is the longest since the bursting of the dot com bubble. Ending the week the biggest storyline was the S&P 500 dipping briefly into bear market territory on Friday. That’s notable for a couple of reasons. First, I’ve regularly compared this market, with the pandemic driven technology stock bubble, to the previous dot com bubble. My commentary last week was this: 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. What we saw, with signs of capitulation beginning to settle in by Wednesday, was the increasing realization by investment firms that what we’re facing is or likely will soon be a recession. Something I’ve regularly highlighted as a possibility since I began seeing data pointing in that direction starting in January. Before breaking down the risk and value proposition of stocks, let's dive into the cryptos.
Like high-flying tech stocks, cryptos have continued their post-fall crash – although there were signs of stabilization through the week. Cryptos stayed down last week but they halted their fall with bitcoin specifically finding some support near $30,000. The Bitwise ETF, which represents the top 10 cryptocurrencies, has fallen a staggering 76% from last year’s highs. Ethereum continues to be the best relative performer as it sits at about 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: 19.72
- S&P 500 avg. P\E: 15.97
The downside risk is 19% based on earnings multiples right now from current levels. That’s 2% less risk than a week ago and 36% less risk than the highs reached last year. The fundamental value for stocks is currently the best since early 2015. This isn’t to say there isn’t more downside from here, however we’re continuing to see pockets value 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 an additional 19% 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.