Stock Market & Crypto Currency Update – August 7th, 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: -5% (-1% last week)
- S&P 500: -7% (-3% last week)
- Nasdaq: -13% (-2% last week)
The positive momentum in the market fizzled last week as the earnings season entered the homestretch. While earnings reports continued to loom large over the markets, the biggest news of all came in the form of a US credit rating downgrade by Fitch. Citing poor governance and continued reckless debt spending by the federal government, combined with recession risk, our country had its debt downgraded for just the second time in history. The downgrade was the first which didn’t directly correspond to a looming debt ceiling standoff. There was also Friday’s jobs report that showed disappointing job growth as well, perhaps pointing to a deceleration in the US economy. As for earnings...
Through Friday, with 84% of companies reporting, 79% of companies have reported positive earnings surprises, and the average earnings beat has been by about 5.9%. The reality, however, is that while most companies are producing better than expected results, the actual numbers aren’t impressive. The decline in earnings has been about 5.2% year-over-year. That’s an improvement over last week, however it’d be the biggest earnings decline since the impact of the pandemic in 2020. An earnings recession appears to be in the offing and it's hard to imagine stock prices successfully sustaining new highs on the back of declining earnings. That’s worth watching over the next week as perhaps investors will become a bit more value minded. As for cryptos...
Digital currencies were generally lower. After basing below $30,000 recently, Bitcoin is has broken back below $29,000 while Ethereum is hovering just above $1,800. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, was essentially flat. Questions about regulation remain. Will the federal government seek to compete with the current crypto players, or will they allow the digital currency space to evolve as it is? 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: 25.56
- S&P 500 avg. PE: 16.02
The downside risk is 37% based on earnings multiples right now from current levels. That’s 3% less risk than a week ago as stocks were lower with fundamentals mostly unchanged. It’s 20% less risk than the highs reached last year. 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.