Stock Market & Crypto Currency Update – October 3rd, 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: -22% (-2% vs week ago)
- S&P 500: -26% (-3% vs week ago)
- Nasdaq: -35% (-2% vs a week ago)
Misery loves company comes to mind here as last week provided another opportunity for selling by investors. If you’re looking for a silver lining, September is historically the worst month of the year for stocks. It most certainly has been thus far this year, with losses of 9% during the month, and that’s saying something given the brutal losses across the board for stocks throughout. So perhaps putting September in the rearview mirror will be a plus. But then again, the worst single days for losses have come in October historically – so you’ll come across those stories as well. And for already nervous investors it may prove to be enough to keep money on the sidelines. Last week included the final GDP revision for the 2nd quarter, and confirmation that we spent the entire first half of this year in a recession – regardless of what the political spin merchants and economic illiterates masquerading as economists suggest otherwise. Two consecutive quarters of negative economic growth has always been a recession. This year isn’t any different and the performance of stocks illustrates the truth and the reality on the ground. The only question now is whether the 3rd quarter we just concluded was an extension of the recession. The Atlanta Fed’s GDP Now tracker, one of the most historically accurate economic estimators, suggests we had positive economic growth. We’ll find out later this month, so perhaps the end to the ever-negative news cycle will abate throughout October – and that could mean there’s good bargain shopping at current stock prices. As for cryptos...
Cryptos mostly outperformed stocks last week, which has been extremely rare and might suggest support and perhaps a bottoming near current prices. Bitcoin was flat to higher just above $19k. Ethereum was about flat sitting just above $1,300. The Bitwise ETF, which represents the top 10 cryptocurrencies was likewise flat. In a risk off environment cryptos are the most speculative place to park money of all and prices have reflected that reality but it's worth watching whether their relationship in trading along with stocks is shifting.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 18.12
- S&P 500 avg. P\E: 15.98
The downside risk is 12% based on earnings multiples right now from current levels. That’s 2% less risk than a week ago and 45% 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 12% 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.