How Low Can Stocks & Crypto Currencies Go? – July 29th, 2024
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. 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 close the DOW, S&P 500 & Nasdaq are to their all-time highs.
- DOW: up less than 1% less week, 2% away from record high
- S&P 500: lost 2% last week, 4% away from record high
- Nasdaq: lost 3% last week, 7% away from record high
The tide has changed considerably over the past two weeks in the stock market last week as investors have been balancing earnings season, with inflation news and presidential politics. In short, earnings have been good, but in the case of many high flying technology stocks, not necessarily great enough to justify historically high valuations. Inflation news has continued to be better with investors widely expecting the Federal Reserve to cut interest rates in September. The political landscape has been turned on its head with the “Trump trade” that had been in full effect preceding President Biden’s exit from the race being paused with Harris’ ascension to presumptive Democrat nominee. To dig a bit deeper into each of those catalysts...
Through Friday 41% of the S&P 500 had reported earnings with growth averaging 9.8% year-over-year, which is higher than a week ago and the highest since the 4th Quarter of 2021. If this holds or is improved upon it will help with the justification of elevated stock prices as the market broadly has been historically expensive. On the inflation front, Friday’s Personal Consumption Index showed Americans paid 2.5% more year-over-year for goods and services which continues to trend closer to the Federal Reserve’s 2% target inflation rate. And as for the political considerations...two weeks ago investors were preparing for a second Trump presidency. Last week, with Biden out of the race and polls showing Harris performing far better than Biden had been against Trump prior to dropping out – there's a wait-and-see mindset that’s begun to set in. The beneficiary of that action continues to be mid and smaller cap companies that had been passed over during the year’s first half rally and that are less likely to be impacted by geopolitics.
Digital currencies had mixed week as the previous week’s “Trump trade” rally was also paused. Bitcoin performed well, almost all others didn’t. Bitcoin gained nearly $2,000 during the week to trade above $68,000. Ethereum lost over $200 during the week to trade above $3,200. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies lost about 5% on the week. I can’t provide value analysis for digital currencies because they retain no inherent value, but I can for stocks because they do. On that note...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 28.52
- S&P 500 avg. PE: 16.08
The downside risk is 44% based on earnings multiples right now from current levels. That’s flat over the past week as fundamentals and stock prices were similar. We currently have the most fundamental risk that’s been priced into the market since April of 2021 when the impact of rising inflation was first being felt. For perspective, the pandemic cycle is the only time valuations have been this high over the past decade and prior to this cycle, you’d have to go back to the Great Recession in ‘08- ‘09 to find prices this high on a fundamental earnings basis.
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.