Stock Market & Crypto Currency Update – August 21st, 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: -6% (-2% last week)
- S&P 500: -9% (-2% last week)
- Nasdaq: -17% (-2% last week)
It’s beginning to feel a lot like last summer right now. The tech heavy Nasdaq posted losses for the third straight week as the AI-led momentum trade continues to show signs that it’s over. At the same time the S&P 500 is once again at risk of reentering correction territory (a loss of 10% or more from highs), as the goldilocks economic theory, or soft landing, is being reconsidered as signs of stubbornly high inflation, increasing economic stress on consumers, and the highest mortgage rates in 22 years are creating market disruptions. Speaking of market disruptions, there have been three key credit ratings events in three weeks. First it was Fitch’s downgrade of the US credit rating. Two weeks ago, Moody’s downgraded numerous bank ratings with others placed on downgrade watch, and last week Fitch placed 70 banks on a credit rating downgrade watch including JP Morgan Chase. Signs of building stress are increasingly apparent after greater than two consecutive years of historically high inflation rates.
While stocks traded lower last week the news was worse for digital currencies. Led lower by Bitcoin, digital currencies ripped lower last week in what was the worst week for the space since November. Already under pressure due to continued regulatory concerns, rumor has it Elon Musk’s SpaceX, one of the biggest investors in digital currencies, began selling off positions. The result was a $3,000 loss for Bitcoin as it sold off to $26,000 while Ethereum is hovering just above $1,600. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, lost 13% on the week. 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: 24.95
- S&P 500 avg. PE: 16.02
The downside risk is 36% based on earnings multiples right now from current levels. That’s 1% lower than a week ago as stocks traded lower while fundamentals also slightly worsened. It’s 21% 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.