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Stock Market & Crypto Currency Update – July 18th, 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: -20%
- Nasdaq: -29%
In case you hadn’t heard...flat is the new up in this environment which almost made the past week a somewhat successful one. While volatility remained the name of the game, stocks averaged trading sideways to a loss of about one percent. What’s most notable about the activity is the relative lack of it by the time the week wrapped up given the onset of earnings season and huge data points like the CPI and consumer spending rates. It’s like this. The news was a real mixed bag last week from an investor’s perspective. Earnings... Meh so far. Inflation... Holy crap territory. Consumer spending... Surprisingly stronger than expected. So, let's break these down. Starting with earnings.
On balance earnings haven’t entirely stunk so far. While it’s shaping up to be the worst earnings season since the pandemic induced recession two years ago, 60% of reporting companies have exceeded expectations and earnings have risen 4% over last year. In this environment any growth could be considered good news. What’s clear about the early going for this earnings season is that it's very much a company specific story which is producing a stock pickers market. Given the state of the economy, that’s about as good as could have been expected and could indicate that some companies have already bottomed out for this cycle. But much of that has to do with...
Inflation. As covered last week the CPI has made a mess out of July. Fresh 41-year high inflation rates with consumer inflation checking in at 9.1%. Aside from that being a daily frustration in our lives every time we go to buy something, it's also something the Federal Reserve was once again surprised by. I’ll sidestep the fact that I illustrated months ago, based on wholesale inflation rate, inflation would peak north of 9% and thus no one should be surprised by this, but the fact remains. We’ve gone from the Federal Reserve raising interest rates by 25 basis points, to 50 basis points, to 75 basis points and now the only question is whether a historic 100 basis point move will soon be announced. I’ll point out something that you likely already know. When you’re the Fed every time you raise interest rates by an ever-greater percentage, you're failing. Historically high inflation is being met by historically high and fast interest rate increases. This will continue to be an issue for the markets, especially tech companies who use debt to grow, until there’s clarity. Speaking of clarity, the Atlanta Fed’s GDPNow tracker is still showing negative second quarter growth of –1.5% for the 2nd quarter which means we’re still on track to hear that the economy has been in a recession on the 28th when the first GDP estimate from the 2nd quarter comes in. As for cryptos...
It’s been a rare week of outperformance for cryptos relative to stocks. For a second consecutive week there’s been a reprieve from the crypto crash with renewed hope by many in the space the worst is behind us. That very much remains to be seen, however the Bitwise ETF, which represents the top 10 cryptocurrencies, rose by about 4% last week, though it's still off about 90% from last year’s highs. Likewise, bitcoin and Ethereum were up similarly with bitcoin sitting at around the $21k threshold – after having dipped below 19k midweek. Is the bottom in or is this a dead cat crypto bounce? That is the question and it's hard to know – especially since there’s no way to apply analytics to crypto valuations given that 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. 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: 19.52
- S&P 500 avg. P\E: 15.97
The downside risk is 18% based on earnings multiples right now from current levels. That’s 1% less risk than a week ago and 39% less risk than the highs reached last year. There’s less risk in the market this week because earnings fundamentals slightly improved while prices didn’t. I don’t expect an additional 18% 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.