How Low Can Stocks & Crypto Currencies Go? December 30th, 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.
Let’s start with a look at the DOW, S&P 500 & Nasdaq as we’re set to close out the year.
- DOW: +14%
- S&P 500: +25%
- Nasdaq: +31%
What a ride it’s been for stocks this year as the AI boom provided the biggest positive market catalyst since the dotcom boom in the 90’s with the election of Donald Trump being the cherry on top to carry to stocks to all-time highs. Optimism has reigned supreme since November 5th.
The incoming Trump administration will bring a significantly improved regulatory environment for all companies. It's expected the incoming administration will quickly eliminate 970 new business regulations imposed by the Biden administration that came at a cost of $1.7 trillion. There is a mixed outlook for many American multi-nationals that will need to sort through what potential tariffs will be and the resulting impact on their businesses.
Additionally, it’s possible if not likely that we’ll see profit taking in big names that helped fuel the rally throughout this year as we enter the next. Many investors carrying large capital gains are reluctant to sell causing a taxable event that would have to be paid this upcoming April as opposed to waiting until January to sell and thus not having to pay taxes on those gains until April of 2026. As for cryptos...
The Trump Train rally with digital currencies has been remarkable since Election Day. Yes, tokens are off of their recent highs, however the gains remain biggest in this space. Nowhere are regulatory changes expected to have a greater impact than with cryptos. The general belief remains that Donald Trump, a crypto advocate, will eliminate regulatory headwinds facing the industry. Year-to-date Bitcoin has risen by 125%. Ether which is trading above $3,300 has gained 46% on the year. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies ran up 154% for the year. Similar to stocks, it's possible many digital currencies investors carrying gains wait until the new year to sell for tax considerations.
Gold, meanwhile, has also had a great year with 28% gains most recently trading at $2,636 an ounce. 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: 30.49
- S&P 500 avg. PE: 16.12
The downside risk is 47% based on earnings multiples right now from current levels. We 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.