Stock Market & Crypto Currency Update – March 13th
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: -13% (-4% last week)
- S&P 500: -19% (-3% last week)
- Nasdaq: -31% (-2% last week)
Where. To. Begin. When the week began last week, few would have suspected the biggest news would have been anything other than what Federal Reserve Chairman Jerome Powell had to say before congress. Or even the jobs report which, by the way, what he did have to say spooked markets as he indicated the Fed may continue to be more aggressive on raising rates than many had anticipated. It turned out to be one of those weeks. The kind we don’t have comps for since 2008. And if you’re not familiar with the financial markets and the economy, just know that if we’re comparing anything happening today with what happened in 2008, it ain’t good. The bigger news than Powell’s thoughts started with something I included in my crypto update in this report last Monday. As I said then: Silvergate Capital, which operates one of the most significant crypto currency banks, issued a warning about their ability to operate going forward. What’s called a “going concern” disclosure. Not only does Silvergate play a prominent role in facilitating many digital currency transactions, but many digital currency traders were also big investors in the bank which has fallen from a stock price of $239 per share in late 2021 to under $6 today. Well, what started last week with Silvergate, continued with the largest bank failure of VC favorite Silicon Valley Bank which entered receivership with the FDIC on Friday in the largest fully federally regulated bank failure since Washington Mutal in 2008. That’s obviously a big deal, but so too the exposure in this failure. 95% of deposits in the bank exceeded FDIC insured limits, as it was the most popular bank among tech startups in the world. Notably, the FDIC stepped in late Sunday to backstop even the uninsured deposits. To attempt to mitigate systemic risk in the economy. While there are a concentration of west coast tech companies disproportionately exposed to this collapse, there are even major Florida-based companies with direct exposure as well. This is a real red herring and what happens next is a pivotal moment in this country. Contagion risk is real. This will be factored into my sentiment in a moment. First for cryptos...
So yeah, as you might imagine, given the general topic of conversation up to this point... It was a brutal week for digital currencies. Through Friday Bitcoin lost $2,000 or close to 10% and sit near $20,000. Likewise, Ethereum gave up about 14% falling below $1,500. The Bitwise ETF, which represents the top 10 cryptocurrencies, was also off about 3% for the week. Late Sunday with the FDIC related news that both deposits at Silicon Valley Bank and Signature Bank those losses were recovered in a strong relief rally in digitial currencies. 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: 20.64
- S&P 500 avg. P\E: 15.99
The downside risk is 23% based on earnings multiples right now from current levels. That’s three percent less risk than a week ago as stock prices fell faster than fundamentals. It’s 34% less risk than the highs reached last year. So that’s the good news. There’s less downside in the market today than there was a year ago today. But that’s also in part due to markets having sold off quite a bit since then. Here’s the change in my tact. Usually, I’d say I don’t expect the decline I project as possible because those types of severe selloffs are rare. My concern regarding contagion risk is high and I can’t quantify where this all goes for here currently. That’s not a good recipe. If invested in stocks I think it’s wise to be fully prepared for a 23% or so selloff from here in case we do see systemic impacts in the economy and potential panic selling in the financial markets. Otherwise, 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.