Stock Market & Crypto Currency Update – February 6th, 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: -8% (flat vs. last week)
- S&P 500: -14% (+1% last week)
- Nasdaq: -24% (+4% last week)
Earnings season kept rolling along, so did the Federal Reserve, ditto job gains and also the trends we’d seen to start the year. Badly beaten down tech stocks performing best with industrials represented in the DOW seeing the smallest gains. Let’s start with the Federal Reserve raising rates. The quarter point move last week made the cost of life more expensive, however it was also the smallest of the recent raises since the Fed began raising interest rates which indicated we’re closer to the end of the increase cycle than not. Ironically, Friday’s much better than expected jobs report might have impacted that calculous to a certain extent, which is why markets didn’t respond more favorably to the news of over a half million new jobs being added with unemployment falling to a 53-year low. But the good news on the job front is especially important for the overall economy because it shows that the big tech corporate layoffs are isolated to big tech companies and not the overall economy. And then there’s earnings performance...
50% of companies had reported through Friday. 70% of companies have reported earnings that have beaten expectations; however, the average result is a year-over-year earnings decline of 5.3% - which is worse than what we were pacing last week and 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. Investors are largely looking past this poor performance, looking at the rest of the economic climate as a positive catalyst instead. As for cryptos...
The bitcoin bulls took a break last week after bitcoin hit six-month highs above $23,000. All leading digital currencies are flat to lower over a week ago. That said it's still been an impressive ride this year. Bitcoin and Ethereum gains remain greater than 35% above where they were in the depths in December. Likewise, the Bitwise ETF, which represents the top 10 cryptocurrencies, has more than doubled from its lows (while still trading about 90% lower than its highs). However, I said this a week ago and it’s worth repeating... This shows that the recent rally in digital currencies may have run its course broadly with investors becoming more selective in which bets they’re placing in the digital realm. Last week played out as I expected. Has the run, run out of juice or are there new investors willing to put new money behind them? 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: 22.11
- S&P 500 avg. P\E: 15.99
The downside risk is 28% based on earnings multiples right now from current levels. That’s 1% more risk than a week ago as stock prices rose while fundamentals were static, however, it’s 29% less risk than the highs reached last year. I don’t expect an additional 28% 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.