How Low Can Stocks & Crypto Currencies Go? – April 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: 4% away – up 1% last week
- S&P 500: 3% away - up 1% last week
- Nasdaq: 3% away – up 4% last week
A week ago, the market was halfway to a correction, a decline of 10% or more. Today that’s not quite the case as the major indexes rallied during the week on the back of strong earnings performances with the tech-heavy Nasdaq posting the biggest gains for the week. Will last week prove to be a head fake on the way towards a correction or will the correction never fully materialize? There’s a lot to consider from economic information to earnings. Let’s start with earnings.
Through Friday 46% of companies had reported earnings for the current reporting season. 77% of companies have topped expectations and earnings growth is now pacing 3.5% year-over year – that's a 3% improvement over a week ago. The meaningful earnings improvement helps explain and justify, to a certain extent, last week’s rally. The qualification is due to the still historically high stock valuations. Stocks remain priced 5% to 13% above their 5- and 10- year trends. A still stronger finish to the earnings season than we’ve seen, at the start could alter that math a little, however on a backward-looking or forward-looking basis the market is still priced at historically high levels.
The other big news is of course what will be with inflation, the economy broadly and interest rate policy. The clear answer, especially after last week’s core personal consumption expenditures report provided yet another indication that inflation has reaccelerated to start the year. The CPE is one of the Federal Reserve’s favorite reports to track inflation, so Friday’s hot reading insurers the Federal Reserve won’t be budging on their interest rate policy anytime soon (unless they consider raising interest rates again).That’s especially important because this Wednesday the Fed will announce their latest policy decision and guidance regarding interest rates.
The other bit of economic news which impacted last week and that must be considered is economic growth. Last week’s especially weak GDP read for the first quarter was about the worst possible news from the Federal Reserve. While inflation was reaccelerating, growth was plummeting, with first quarter economic growth checking in at just 1.6%. We’ll see what the Fed has to say on Wednesday about all of that and the markets will move on the news no doubt. As for cryptos...
Digital currencies generally continued to trade flat to lower for the sixth week out of seven. Bitcoin was off about $1,000 on the week sitting above $63,000. Ethereum performed better as it gained around $100 on the week to trade above $3,200. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 2% on the week for a second straight week. On the one hand it’s a good sign for digital currencies that they’ve been able to hold prices near current levels given the risk off trade that’s been happening in the financial markets of late. On the other hand, they’ve not been able to take a leadership position during this time of increased uncertainty. 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: 27.68
- S&P 500 avg. PE: 16.06
The downside risk is 42% based on earnings multiples right now from current levels. That’s higher than last week due to a modest improvement in fundamentals but stock prices rising faster than fundamental improvement. Stocks 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.