How Low Can Stocks Go? And What’s Up With Cryptos? – December 6th, 2021

How Low Can Stocks Go? And What’s Up With Cryptos? – December 6th, 2021

Bottom Line: 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. I want you to benefit from it without making emotional mistakes with money. Too often when we have a rare short-term downturn in the markets - it's too late to offer up information that might have been helpful ahead of time. My first rule of money is to never let your money and emotions cross paths. 

Here's how the Dow, S&P 500 & Nasdaq have performed year-to-date:

• DOW: +13% YTD
• S&P 500: +21% YTD
• Nasdaq: +17% YTD

From omicron to inflation stuff has started to hit the fan with investors the past couple of weeks. And that was before Friday’s disappointing jobs report. It was another negative week for stocks, as investors have started to lock in gains while taking a wait and see approach with what happens with both omicron and inflation from here. There’s one more major unknown that shouldn’t be lost on investors this month (and likely won’t be with many on Wall Street). The threat of tax increases on income and investment gains. The current Democrat BBB plan calls for an increase on both income taxes and on investment gains. That’s a double-whammy of straight up moronic economic policy that represents an existential threat to the markets this month. While it’s possible it could pass this month and be made retroactive to January 1st, meaning any tax strategy selling would be a moot point, the greater likelihood based on the current pushback from Senator’s Manchin and Sinema is that if a version of it were to pass it’d be next year. That could prompt significant selling by investors late this month who want to lock in a 15% tax rate on investment gains as opposed to what could be as high as a 39.6% tax rate should the Build Back BS plan pass. December’s usually a great month for stocks. This one has a lot working against it, much like this country, under its current leadership. As for cryptos over the past week...

Cryptos have gotten clobbered. Recent selling accelerated through the weekend with Bitcoin touching $42,000 at one point with a price of around $48,000 as of this report. That’s a haircut of $21,000 from its recent highs. Likewise, Ethereum and other notables have similarly been hit hard. There are a lot of buyers of cryptos on the dips which may help mitigate losses here, but there’s no telling what the short-term outlook might be. 

Here’s where the market stands based on fundamentals using the S&P 500 as the example.

• S&P 500 P\E: 28.59
• S&P 500 avg. P\E: 15.95

The downside risk is 44% based on earnings multiples right now from current levels. That’s 11% less risk than the highs reached earlier this year due to improved earnings and the recent selloff. There’s 1% less risk than a week ago due to a decline in stock prices. It's always important to ensure that you're positioned for negative adversity. I don’t expect anywhere near a 44% decline, however in theory it’s possible if the near worst case outcomes occurred. 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 long term objectives.