How Low Can Stocks & Crypto Currencies Go? October 14th, 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: +2% last week, set a new record high
- S&P 500: +1% last week, set a new record high
- Nasdaq: +1% last week, set a new record high
All news seemingly continues to be good news for stocks as the incredible stock market melt up continued last week propelling the major indexes to record highs once again. One key difference between the rallies in recent weeks and what we saw late week rally was based at least in part off substance as opposed to blind optimism. The third quarter earnings reporting season has begun to open up with key financial companies reporting promising results.
Through Friday 6% of companies had reported earnings for the third quarter. 79% of companies reporting have topped expectations with earnings growth of 4.1% year-over-year. What matters most with these early numbers is that we’re talking about real growth in earnings net of inflation. Something that’s often forgotten by investors when looking at company performance is that inflation has risen by 22% since January of 2021. That means a company must have increased its earnings by 22% just to break even with the same performance of four years ago. That hasn’t consistently happened. With inflation in the mid-2% range now – this early growth rate in earnings is delivering real net earnings growth for investors. We’ll see how this week develops as earnings reporting season gains stream with many more companies reporting. As for cryptos...
For the second straight week there was a bit of decoupling with the Nasdaq’s performance but not necessarily in a good way. While the Nasdaq was higher for the week, Bitcoin was mostly flat above $62,000. Ditto Ethereum which is still trading in the $2,400 range. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies did manage to produce a gain, essentially tracking the Nasdaq’s performance gaining just over 1% on the week as second and third tier tokens performed best for a second straight week.
Gold meanwhile continues to be the steadiest asset as it held near recent highs at $2,670 an ounce and is flat for the past three weeks. Cryptos are near the higher end of their trading range but still well-off highs. 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: 30.38
- S&P 500 avg. PE: 16.09
The downside risk is 47% based on earnings multiples right now from current levels. That’s up about 1% over the past week as stock prices once again rose faster than fundamentals. We currently have a cycle with 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.