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Stock Market & Crypto Currency Update – July 11th, 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%
There hasn’t been a lot of good news or good weeks for investors this year but last week brought some and brought one. On the back of gains ranging from one to three percent based upon the index, with a rare week of outperformance for tech companies, the S&P 500 has moved ever-so-slightly back out of bear market territory (a decline of 20% or more), just in time for the start of the second quarter earnings season. The market got a one-two-three punch of news many investors wanted to hear. First, the Federal Reserve intends to remain highly aggressive in raising rates to attempt to combat inflation. While that may not sound like fun for investors, it’s the Band-Aid effect. Most investors would rather rip the bandage off quickly and get it over with, than protract the process leading to a longer period of pain. Another bit of news that mattered was out of Samsung. They issued earnings guidance that didn't stink as bad as many thought it would. They’re a big barometer of consumer spending which indicated the earnings season we’re entering may not be the debacle some are fearing it will be. And the third was Friday’s better-than-expected jobs report. Many have read way too much into it as I discuss in today’s Q&A, because the number that mattered most was wage growth declining relative to inflation, but hey, more jobs added than expected is something decent for sure. As earnings season kicks off this week, key reports which will move markets will come in from PepsiCo and Delta on the consumer spending side – and Blackrock, Citi, JP Morgan, Morgan Stanley and Wells Fargo on the financial side. Stand by for news... As for cryptos...
The past week has provided a rare reprieve from the crypto crash. The Bitwise ETF, which represents the top 10 cryptocurrencies, rose by about 10% last week, though it's still off over 90% from last year’s highs. Likewise, bitcoin and Ethereum were up similarly with bitcoin having reclaimed the $20k threshold. Is the bottom in or is this a dead cat crypto bounce? Hard to know – especially since there’s no way to apply analytics to crypto valuations given they retain no inherent value. 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: 19.71
- S&P 500 avg. P\E: 15.97
The downside risk is 19% based on earnings multiples right now from current levels. That’s 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 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.