How Low Can Stocks & Crypto Currencies Go? – April 22nd, 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: 5% away
- S&P 500: 5% away
- Nasdaq: 7% away
Halfway to a correction. The stock market correction (a decline of 10% or more) that I’ve suggested since February was likely, due to historically high valuations, appears to be taking hold on Wall Street. After another losing week for the major averages – with the tech heavy Nasdaq shouldering most of the losses as its AI highfliers, led by Nvida, are already in correction territory, gravity and history suggests there’s more selling to come. One of the top tells that the market is set to correct is that good news hasn’t been enough to save companies from selling off. For example, Netflix reported terrific earnings and sold off 9% on the news. With that said earnings are always important but especially so with valuations once again coming into focus.
Through Friday 14% of companies had reported earnings for the current reporting season. 78% of companies have topped expectations, though earnings growth has only paced 0.5% year-over year. A number that’s not supportive of the huge rally that the market has experienced over that time. Valuations, even after the recent selling, remain well above the 5- and 10-year averages. An additional market selloff of between 4% to 12% from current levels is needed to pull even with those averages on a forward-looking basis. A stronger finish to 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.
As for cryptos...
Digital currencies have generally continued to trade flat to lower for the fifth week out of six. It was a wild ride getting there but Bitcoin was essentially flat on the week sitting above $64,000. The story was similar for Ethereum as it’s basing at around $3,100. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was off about 2% on the week. As stocks have been selling off there’s also a risk off trade that’s been present in digital currencies that’s led to investors sitting on the sidelines. I can't provide any value analysis for cryptos behind they don't have any inherent value but I can for stocks because they do.
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 26.96
- S&P 500 avg. PE: 16.06
The downside risk is 40% based on earnings multiples right now from current levels. That’s lower than last week due to slightly improved fundamentals due to earnings reporting along with stocks trading lower, though it generally remains 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.