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Stock Market & Crypto Currency Update – September 26th, 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: -20% (-3% vs week ago)
- S&P 500: -23% (-3% vs week ago)
- Nasdaq: -33% (-4% vs a week ago)
Welcome to the new lows for the year and a brutal bear market. After another week of solid selling on Wall Street which included another Friday freakout session, which brought the DOW below 30,000 for the first time since January of last year, all major indexes are beholden to the bear (a decline of 20%) or more. Yes, the Federal Reserve raised interest rates by another three-quarters of a percent. Yes, that was widely anticipated, but what seemingly wasn’t by some investors until just about now is the reality that we’re in a recession. It’s not just that the Biden administration and some economists have attempted to play a game of suggesting the textbook definition of a recession – two consecutive quarters of negative GDP growth – isn't a recession, it's that evidently some investors were duped into believing the economically spun political poo.
What changed the most over the past week isn’t a story of fundamentals, it’s a reality check. It marked the first time most economists admitted that we’re in a recession. The people. As I mentioned last week, the FedEx CEO laid the case out very simply two Thursdays ago when he said... We’re seeing that volume decline in every segment around the world. And went on to say we’re in a worldwide recession. Last week most of the oft wrong economists just happened to catch up with reality. Now, being near two-year lows in the value of stocks doesn’t make for fun portfolio and retirement accounts checking, however with reality finally being acknowledged and most now accounting for economic realities, there’s a reasonable chance stocks may soon find a bottom. As for cryptos...
Bad news for stocks has consistently meant worse news for cryptos. That continued to be the case last week. Bitcoin was off over big and is back below $19k. Ethereum bucked the trend a bit and is about flat sitting just above $1,300. The Bitwise ETF, which represents the top 10 cryptocurrencies, dropped about 10% over the past week as well. In a risk off environment cryptos are the most speculative place to park money of all and the price action continues to reflect it.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 18.66
- S&P 500 avg. P\E: 15.98
The downside risk is 14% based on earnings multiples right now from current levels. That’s 4% less risk than a week ago and 43% less risk than the highs reached last year. The market is currently priced with the best valuation relative to current fundamentals since 2014. There’s less risk in the market this week because stock prices declined faster than fundamentals. I don’t expect an additional 14% 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.