Photo: Getty Images
Stock Market & Crypto Currency Update – June 21st, 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 who were early, however most investors in the crypto space have now lost money on their original investments. 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.
Here's how far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -19%
- S&P 500: -24%
- Nasdaq: -33%
Another week, more selling and a fully entrenched bear market, as the S&P 500 didn’t just touch bear market territory – it's mired in it after a 5% loss for the index last week. Of course, the news comes on the back of inflation running at 41-year highs and the Federal Reserve now raising interest rates by the largest amount, .75% it has in one meeting in 28 years. The biggest question which remains in the business and investment realm isn’t whether there will be a recession or not, it’s whether we’re already CNBC’s recent 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. Last week I said this: 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. Thus, what we saw last week. But stocks are leading indicators. That means they’re likely to bottom out before we have economic clarity, just as they started selling off before most were taking the threat of a recession seriously. Are we there yet? The median selloff for the S&P 500 during a recession is 27% and the average length of time to reach a bottom is five months. Highs were hit in late December – so we’re already six months into this now, bear market, and the S&P 500 is within 3% of the normal top to bottom selloff. I report, you decide... As for cryptos...
By now every notable crypto skeptic has sounded the alarm on the obvious pitfalls of digital assets (they’ve been willed into existence and retain no inherent value). The crypto space has crashed and its calling card, decentralization, is also its current challenge as many tokens and service providers are fighting to remain viable. Without any banking system or government to step in to provide liquidity and financial support – there’s no real way of knowing where this story settles out. There's just the realization that there will be far fewer players when it does. The Bitwise ETF, which represents the top 10 cryptocurrencies, was off slightly again and has fallen a staggering 91% from last year’s highs. What’s changed the most over the past week has been the next leg down for the leaders. A week ago, conversation centered around whether bitcoin could hold $30,000. Today the question is if it can hold $20k. Bitcoin has lost 70% of its value since last fall’s highs. That’s the fall from grace which has led to most crypto investors having now lost money. Likewise Ethereum, the second most significant crypto, is now off 76%. As I mentioned last week, 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: 18.57
- S&P 500 avg. P\E: 15.97
The downside risk is 14% based on earnings multiples right now from current levels. That’s 5% less risk than a week ago and 41% 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. The fundamental value of the S&P 500 is now the best it's been in about eight years – as stock prices have fallen faster than fundamentals. It's always important to ensure that you're positioned for negative adversity. I don’t expect an additional 14% 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.