Stock Market & Crypto Currency Update – May 15th, 2023
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, however most investors in the crypto space have now lost money on their original investments. 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 far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -10% (-1% last week)
- S&P 500: -14% (flat last week)
- Nasdaq: -24% (flat last week)
Another weekend with no additional bank failures can be considered a plus. Likewise lower oil prices can be as well, though – recent declines in the wholesale oil prices are a byproduct of a stronger dollar (as Republicans appear ready to hold the line on spending in Congress with the looming debt ceiling standoff, the dollar posted its strongest week in three months) but also weaker demand. A stronger dollar for most of us is a good thing. Weaker demand raises additional concerns about the state of the economy. That kind of sums up the flat to lower week for stocks. Earnings season effectively came to a close with a bit of a tailing off in performance. Through Friday 92% of companies had reported earnings. The average outcome has been a decline of 2.5%. That’s a bit worse than the pacing at this time last week, still, while a decline in earnings is never a good thing for investors or the economy at large, the decline was less than half of what was expected coming into the earnings reporting season – which has been a leading reason as to why stocks have held up as well as they have against the backdrop of the banking crisis, debt ceiling concerns, geopolitical issues, etc. Attention for the upcoming week will largely shift toward the debt ceiling debate with the potential for the Biden-McCarthy negotiations to significantly move markets. As for cryptos...
While flat to lower pretty much sums up the stock market’s performance, the same can’t be said about digital currencies as they posted their worst week in six months last week, with leaders seeing their lowest prices since the onset of the banking crisis in mid-March. Bitcoin enters this week over $2,500 lower than last sitting above $26k. Ethereum is off less, have dropped just over $100 sitting just below $1,800. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies dropped to its lowest levels since March as well. Questions about regulation remain and speculation. Regulators are continuing to cast a shadow over the sector as it’s unclear where and how new threatened regulations from world governments, but especially our federal government, will impact. Additionally, with consumer metrics on the decline and economic concerns on the rise, the appetite for sheer speculation is nearly non-existent with insituitional investors, leaving the digital currency markets to largely be moving on the basis of smaller investors which are more susceptible to economic risks. I can’t provide value analysis for cryptos currencies because they retain no 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: 23.87
- S&P 500 avg. PE: 16.01
The downside risk is 33% based on earnings multiples right now from current levels. That’s flat with a week ago as prices and fundamentals were essentially unchanged. It’s 24% less risk than the highs reached last year. My concern regarding contagion risk remains high and I can’t quantify where this all goes from here currently. If invested in stocks, I think it’s wise to be fully prepared for a 33% or so selloff from here in case we do see systemic impacts in the economy and potential panic selling in the financial markets. Otherwise, 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.