Stock Market & Crypto Currency Update – January 3rd, 2023
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: -10%
- S&P 500: -20%
- Nasdaq: -35%
The headlines exiting 2022 said it all. Last year was the worst year for stock market investors since 2008 – the first full year of the Great Recession. Good times, right? Of course, the year did feature a textbook recession – with two quarters of negative economic growth to start the year amid a 41-year high inflation rate at the time. And we ended the year with a thud as the current consensus by economists is for a recession this year – 70%. But hey, economists were wrong about inflation and its impact on economic growth last year, so maybe we’ll get lucky, and they’ll be wrong this year? If so, there’d be a lot of room for upside in stocks – especially those hardest hit in the Nasdaq. Speaking of which, last year provided a tale of three markets based on the components of the three major indexes.
While the market wasn’t good anywhere, we saw a correction (decline of 10% or more) play out for the DOW, a bear market (decline of 20% or more) for the S&P 500, and a crash (decline of 30% or more) for the Nasdaq. As a result, we saw about as much variance in retirement and investment account performance as we ever have based on how heavily portfolios were weighted towards the high-flying tech stocks which were crushed, compared to the more stable staples. In general, there’s room for optimism from where I sit using history as a guide. Only 9% of the time has the US stock market been down in consecutive years – meaning there’s obviously a chance – but with the historical odds on the side of investors this year. As for cryptos...
What was bad for stocks was worse for cryptos. Entering 2023, bitcoin is sitting a whopping 76% below all-time highs and the news is generally as bad or worse. That includes ethereum sitting 75% below highs and the Bitwise ETF, which represents the top 10 cryptocurrencies, trading a stunning 94% lower. This shows that in this especially skeptical risk off environment, there’s little appetite for digital currencies beyond the established leaders and an overwhelming degree of skepticism generally. I can’t provide valuation analysis on any of them because they retain no inherent value. As for stocks which do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 19.97
- S&P 500 avg. P\E: 15.99
The downside risk is 20% based on earnings multiples right now from current levels and it’s 37% less risk than the highs reached last year. I don’t expect an additional 20% 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 longer term objectives.