Stock Market & Crypto Currency Update – January 17th, 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: -7% (+2% last week)
- S&P 500: -17% (+2% last week)
- Nasdaq: -31% (+3% last week)
There are still three very different stock market lanes based upon the index you look at, but all rallied for the second consecutive week to start the year. The DOW is now firmly outside of even correction territory, while the S&P 500 has budged away from a bear market, while the tech-heavy Nasdaq continues to be very much mired in the middle of one. That said, we have seen a bit of a reversal thus far. After greater than a year in which staples have outperformed technology companies, beaten down tech stocks have rallied a bit stronger than the staples as investors have sought value as they continue to assess what the heck is set to happen with the economy this year. The big news this past week, was the most important news we get in any month. The inflation stuff. And the absence of worse news within the report was interpreted to be good news.
As I commonly joked about how inflation was anything but “transitory”, all throughout the rise to eventual 41-year high inflation rates, the one thing you could be on was the consensus economist forecast undershooting the inflation rate. Last week’s CPI, or Consumer Price Index report, marked the second consecutive in which economists' projections were on the money. That matters for two reasons. First, inflation – while still pacing a rate that’s 6.5% and is far greater than that of wage growth – is thus a problem...it’s slowly coming down. And second, it means the economists finally seem to have a bit of handle on what’s actually happening in the real world, which provides a bit more certainty in looking forward. The consensus forecast still calls for a shallow recession this year, not unlike last, but it’s a bit more upbeat than it’s been in a while. As for cryptos...
Digital currencies have begun to react the way they once did. Trading higher in sympathy with tech stocks but with outsized gains. The bitcoin bulls are back and fueled gains of greater than 20% through the first half of January with the cryptocurrency trading back above $20,000. That’s carried through to the others generally as well with ethereum having bounced greater than 30% from its lows. And the biggest bounce of all? The non-leaders that had all but been left on deaths door. the Bitwise ETF, which represents the top 10 cryptocurrencies, is now 75% above its lows (while still trading greater than 90% lower than its highs). It's clear speculators have jumped in to catch a bounce in the early going this year. What’s changed? Sentiment. That’s it. There are simply more people willing to chase risk at the moment. The question is whether and for how long that will continue. 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: 20.80
- S&P 500 avg. P\E: 15.99
The downside risk is 23% based on earnings multiples right now from current levels. That’s 2% more risk than a week ago as stock prices moved higher but fundamentals remained unchanged, however it’s 34% less risk than the highs reached last year. I don’t expect an additional 23% 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.