Photo: Getty Images
Stock Market & Crypto Currency Update – July 5th, 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: -16%
- S&P 500: -21%
- Nasdaq: -31%
The first half of the year ended appropriately enough with a thud. In what proved to be the worst first six months in a year for the stock market since Raindrops Keep Fallin’ on My Head was the number one song in the country, yes 52 years... Friday's rally to begin the second half of the year was a positive one, leading to hope that perhaps the worst is behind us but that still left stocks lower by an average of one to three percent for the week. The S&P 500 is back in bear market territory, the Nasdaq’s down over 30% once again, and question marks about what’s next are everywhere. Last week I said this after the previous week’s rally...
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. The next and biggest catalyst for stocks will come in two specific ways. Earnings estimates and 2nd quarter GDP. 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.
So, what’s changed in the past week? Nothing, several companies have issued earnings warnings and most ominously, but to me not surprisingly – since I’ve been warning of a likely recession since January, the closely watched Atlanta Fed's GDP tracker called GDPNow, is now predicting that the economy contracted by 2.1% in the second quarter - which combined with the negative first quarter growth would mean we’ve been in a recession. Stocks are leading indicators so it's not all bad from here even if we’ve been in a recession. Stock prices already reflect a lot of the negativity. The question is how deep and long lasting is it? As for cryptos...
The crypto crash continued last week taking many financial service entities in the digital currency space down with them. The Bitwise ETF, which represents the top 10 cryptocurrencies, was off a remarkable 25% last week alone and has fallen a staggering 93% from last year’s highs. Bitcoin was off another 10% last week having lost about 73% of its value since last fall’s highs, having fallen below $20k. Likewise Ethereum, the second most significant crypto, is now off 75% from highs. 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. Most investors in the crypto space have now lost money attempting to trade them. 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: 19.33
- S&P 500 avg. P\E: 15.97
The downside risk is 17% based on earnings multiples right now from current levels. That’s 2% less risk than a week ago and 38% less risk than the highs reached last year. There’s less risk in the market this week because fundamentals didn’t change meaningfully over the past week, but the price of stocks did. I don’t expect an additional 17% 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.