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Stock Market & Crypto Currency Update – August 8th, 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: -11% (flat vs a week ago)
- S&P 500: -14% (+1% vs a week ago)
- Nasdaq: -22% (+2% vs a week ago)
Stocks generally grinded a bit higher over the past week as the earnings season continued to generally impress which overshadowed the continued concerns about recession risk and a Federal Reserve which is sure to remain aggressive in raising interest rates amid stubbornly high inflation and Friday’s better than anticipated jobs report. Through Friday, 87% of all companies had reported earnings for the current quarter with 75% exceeding expectations with average earnings growth of just under 7%. That’s truly impressive performance in the face of what’s been happening economically and helps justify the rally off of the bear market lows for many companies. It’s likely to remain more of a stock pickers market than one with specific trends as earnings season winds down. The uncertainty going forward might weigh on many companies which have underperformed as well. As for cryptos...
The leading players are off slightly over the past week, however, are maintaining prices they’d rebounded to off of the spring and early summer crash within the space. This has led to some becoming increasingly optimistic that the worst is over, and the crash was a case of growing pains, not unlike the dotcom bubble busting in early 2000. That remains to be seen, but there has been a certain resiliency of late. In this shakeout a flight to quality, a prioritization of the leaders, has been evident. The Bitwise ETF, which represents the top 10 cryptocurrencies, remains close to 90% below one-time highs, while bitcoin is off about 65% and Ethereum at 62% below its highs. There’s no way to provide analysis on crypto valuations given that they retain no inherent value. 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: 20.94
- S&P 500 avg. P\E: 15.97
The downside risk is 24% based on earnings multiples right now from current levels. That’s 1% more risk than a week ago but 33% less risk than the highs reached last year. There’s more risk in the market this week because stock prices improved faster than earnings fundamentals. I don’t expect an additional 24% 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.