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Stock Market & Crypto Currency Update – June 27th, 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: -15%
- S&P 500: -19%
- Nasdaq: -28%
Lost in the news cycle on Friday, for obvious reasons, was a furious rally to cap the week which was a really good one for change. Stocks posted gains averaging 4%-5% depending on the index – which was sufficient to lift the S&P 500 out of bear market territory. The question of course...will it stay there? There’s at least as much skepticism about this being yet another short-lived bear market rally as there is the belief that the worst of this selling cycle is behind us. With this week closing out the first half of the year, some portfolio shuffling by money managers may keep a sharp selloff at bay. The next and biggest catalyst for stocks will come in two specific ways. Earnings estimates and 2nd quarter GDP. The third and final revised GDP estimate from the first quarter hits Wednesday. Third estimates rarely change meaningfully so unless it does that’s not likely to be a big catalyst. Instead, the date I have circled on my calendar is just over a month off – July 28th when we receive the first estimate for 2nd quarter growth. That’s the one which will tell us whether we’ve staved off a recession for now or whether we’ve been in one. Before then, corporate earnings will take center stage and as far as the stock market is concerned... If there’s a rush of warnings about quarters that will come up short of previous guidance – look out below. If there isn’t, markets would have a chance to rally. There’s a ton of uncertainty out there and not much visibility for the next month – so expect high volatility to be the norm and be prepared for just about anything. As for cryptos...
The biggest news in the crypto space over the past week was stabilization. After a full-fledged crypto crash which had been gaining velocity in recent weeks – there was relative stability which stepped in at least short term. The Bitwise ETF, which represents the top 10 cryptocurrencies, has fallen a staggering 91% from last year’s highs – however it’s flat against a week ago – which could be considered a win at this point. Ditto the biggest and most important player bitcoin. Last week the question was whether it could hold $20k. After briefing dipping below, it has. While bitcoin has lost 70% of its value since last fall’s highs, its holding at over $21,000 entering this week. Likewise Ethereum, the second most significant crypto, has stabilized and is now off 74% from highs – trading above $1,200 for the first time in two weeks. Is the bottom in for cryptos? Harder to know than even attempting to discern the same for equities. As I’ve frequently mentioned, 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: 19.77
- S&P 500 avg. P\E: 15.97
The downside risk is 19% based on earnings multiples right now from current levels. That’s 5% more risk than a week ago but 36% less risk than the highs reached last year. There’s more risk in the market this week because fundamentals didn’t change but the price of stocks did. A week ago, I mentioned the fundamental value of the S&P 500 was the best it'd been in about eight years. Stocks responded like it. 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.