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Stock Market & Crypto Currency Update – August 15th, 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: -9% (+2% vs week ago)
- S&P 500: -12% (+2% vs week ago)
- Nasdaq: -20% (+2% vs a week ago)
Forget the bear market for a moment, not only has the S&P 500 rallied well beyond bear market territory – with now only the Nasdaq teetering around it – but the DOW isn’t even in correction territory any longer. Some relatively strong earnings and signs of inflation having peaked in June have been more than enough to sustain an impressive multi-week rally off of the bear market lows. As earnings season has essentially run its course the scorecard looks like this... 75% exceeded expectations with average earnings growth of about 7%. Not bad in the midst of a technical recession to say the least. What’s more, analysts now expect earnings growth to improve off of that level in the 3rd quarter – with expectations for +8% earnings growth. It remains to be seen whether the impressive rally can sustain in coming weeks, however the improving optimism has largely been founded with improved fundamentals for corporate America. As for cryptos...
The pain remains real for enthusiasts who’d been invested in cryptos early this year. All digital currencies remain in crash territory, off a minimum of 50%+. However, like the price action in stocks, prominent digital currencies have been able to string together several weeks of wins – with prices for most leading digital currencies entering this week at two-month highs. The Bitwise ETF, which represents the top 10 cryptocurrencies, has rallied 54% off of its July lows (though it remains 80% below its all-time high), while bitcoin has recovered to levels above $24,000 and is now about 64% below peak levels with Ethereum the best relative performer at 58% below its highs. The most meaningful news over the past week was the call by JP Morgan stating they think the bottom in digital currencies is behind us. They’re the first major firm to take that stance. 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: 21.63
- S&P 500 avg. P\E: 15.97
The downside risk is 26% based on earnings multiples right now from current levels. That’s 2% more risk than a week ago but 31% 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 26% 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.