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Stock Market & Crypto Currency Update – June 13th, 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. 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.
Here's how far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -15%
- S&P 500: -19%
- Nasdaq: -30%
It was a wipeout week for stocks which ended with a Friday thud. Declines averaged 4% last week as recession fears continued to crank up, along with inflation which was shown to have hit a fresh 41-year high in May. Inflation not having peaked, despite the Federal Reserve having raised interest rates in each of the past couple of months, is important for two reasons. First, the obvious. It’s awful for us, which can’t be good for the economy – since consumer spending accounts for 70% of the US economy. The other is how unreliable economists have been. Investors don’t likely uncertainty. There more of it there is, the more volatile the markets will be and the greater the money which will stay on the sidelines until there’s greater clarity. Wall Street and government economists, who have been consistently wrong in their economic assessments since the onset of the pandemic over two years ago, are no longer trusted by many in the financial markets. This has increasingly led many to wonder if we’re in a recession right now, as their forecasts have called for growth in the current quarter – not unlike the first quarter which proved wrong. CNBC’s CFO survey found literally every CFO of a publicly traded company they recently surveyed thinks the US will be in a recession no later than the first half of next year. When a recession becomes the “base case”, in corporate America – it's hard to expect stocks to rally. This will no doubt remain a stock pickers market – which has clearly been the case during the selloff with tech stocks underperforming staples two to one. The Federal Reserve will once again raise interest rates this week. The question will be what their forward-looking language is regarding increases in the face of still rising inflation. As for cryptos...
Once again following the lead of tech stocks, the already crushed crypto space remained under pressure last week. The Bitwise ETF, which represents the top 10 cryptocurrencies, was off slightly again and has fallen a staggering 89% from last year’s highs. Many have compared the crash in cryptos to the dotcom bubble crash, with good reason. We’re in the midst of a purging of many of the 2nd and 3rd tier cryptos as risk assets continue to come under huge pressure. Like a myriad of dotcoms from over 20 years ago – they don’t produce earnings or profits which is hard to justify for many in this risk off environment. The next challenge for the crypto space is what’s happening to the leaders. Bitcoin had consistently held near $30,000 in the recent weeks. That’s no longer the case as it sold off to around $24,500 – the lowest since 2020. Likewise selling of Ethereum has picked up and it's now hitting new lows for the year. Another dynamic in play in the crypto space. Most crypto investors have now lost money. The rush to buy during last year’s crypto boom led to many first timers jumping in at what proved to be highs for the space. That’s led to a lot of pain of late. Investors should take note as to why they’re in or would consider cryptos. Is there a thought out pragmatic rationale? Or is it to attempt to get rich quick because some people who were early on some of them did? If it’s the latter – that's never a good justification for an investment. There’s no way to provide valuation analysis for cryptos but 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: 19.71
- S&P 500 avg. P\E: 15.97
The downside risk is 19% based on earnings multiples right now from current levels. That’s 4% less risk than a week ago and 36% less risk than the highs reached last year. There’s less risk in the market this week because fundamentals didn’t change but the price of stocks did. 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.