Stock Market & Crypto Currency Update – January 23rd, 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: -9% (-2% last week)
- S&P 500: -17% (flat last week)
- Nasdaq: -32% (-1% last week)
As earnings season for corporate America kicked off, stock prices began to generally sell off. The two-week rally to start the year paused last week as what’s next for earnings and the economy came firmly into focus. With 11% of companies having reported through Friday the news from companies hasn’t been so good. 67% of companies have reported earnings that have beaten expectations, however the average result is a year-over-year earnings decline of 4.6%. If that holds it’ll be the worst earnings decline in three years, when the impact of the pandemic was first being felt by companies. Yes, Federal Reserve policy on interest rates matters. Yes, whether the US economy reenters a recession matters. But fundamentally what matters most to stock market investors is the bottom line. And the early indications this earnings season are, that if not the US economy, certainly corporate America’s earnings are in recession – which can create a self-fulfilling prophesy of sorts – if companies continue to respond to lower earnings with more layoffs. This week’s earnings reports are among the most important for stock market investors in years. As for cryptos...
The stock market selling hasn’t slowed down the bitcoin bulls. In a strong sign for the new year run for digital currencies, they managed to decouple from stock market performance in a positive way over the past week. Bitcoin tacked on another 10% last week now trading above $22,000. That’s carried through to the others generally as well with ethereum having now bounced greater than 35% 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, has more than doubled from its lows adding another 20% last week (while still trading about 90% lower than its highs). Its 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: 20.66
- S&P 500 avg. P\E: 15.99
The downside risk is 23% based on earnings multiples right now from current levels. That’s flat with a week ago as stock prices and fundamentals traded in line with each other, 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.