Photo: Getty Images
Stock Market & Crypto Currency Update – August 29th, 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: -13% (-4% vs week ago)
- S&P 500: -16% (-4% vs week ago)
- Nasdaq: -25% (-3% vs a week ago)
It was a brutal week for stocks that ended with a thud as the multi-month rally off of the bear market lows began to give way to uncertainty about what’s next in the economy. Speaking of which, during the week, the economy was confirmed to have indeed entered a technical recession with revised second quarter growth remaining negative. The story wasn’t helped when a smattering of earnings reports rolled in from companies like Macy’s and Nordstrom with plenty of not-so-good news about what’s happening right now and where they think sales and earnings are going from here (as an aside, keep your eyes open for legit sales for the first time in a few years as we head into the fall). But nothing quite compared to what Federal Reserve Chairman Jerome Powell had to say on Friday. In his annual Jackson Hole speech, he didn’t just indicate the Fed would remain on the throttle raising interest rates to attempt to combat our still 40+ year high rate of inflation, he used the word “pain”. Quoting Powell: We will use our tools forcefully. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. So yeah, that’s not going to give anyone the economic warm and fuzzies and make no mistake, President Biden’s endless desire to invent ever more money out of thin air and throw it at things is only adding to the level of aggressiveness by the Fed to fight it. As for cryptos...
While the stock market didn’t respond favorably to “economic pain”, cryptos once again cratered on it and are now at risk of testing the lows reached earlier this summer. Bitcoin’s back below $20k, Ethereum – while continuing to hold up better than other cryptocurrencies – is below $1,500. The Bitwise ETF, which represents the top 10 cryptocurrencies, it at its lowest levels since July as well. We can make it complicated, but in the realm of digital currencies we don’t have to. We’re in a recession, there’s lots of economic uncertainty and the head of the Fed is talking about pain. This makes investors nervous, and nothing, this side of gambling at a casino is more speculative than holding digital currencies which retain no inherent value. That’s going to prove to be a major headwind until there’s more clarity.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 20.50
- S&P 500 avg. P\E: 15.97
The downside risk is 22% based on earnings multiples right now from current levels. That’s 3% less risk than a week ago and 35% less risk than the highs reached last year. There’s less risk in the market this week because stock prices fell slightly faster than fundamentals. I don’t expect an additional 22% 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.