How Low Can Stocks & Crypto Currencies Go? February 18th, 2025
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.
Let’s start with a look at how the DOW, S&P 500 & Nasdaq have performed year to date:
- DOW: +5% (flat last week)
- S&P 500: +4% (+1% last week)
- Nasdaq: +4% (+2% last week)
Optimism continued to reign supreme in the stock market over the past week as even a reacceleration of inflation didn’t damper spirits by the end of the week. Both the Consumer Price Index, which showed consumer inflation rising to an annualized rate of 3% in January, and the Producer Price Index, which showed wholesale inflation rising to 3.5%, were quickly digested and moved on by investors. While investors took inflation reacceleration in stride – one certainty is that the Federal Reserve won’t be cutting interest rates anytime soon. This means a window of higher interest rates is likely to remain in place through at least the first half of this year. Meanwhile earnings remained in focus over the past week...
Through Friday, with 77% of companies reporting, 76% had exceeded expectations with earnings growth pacing 16.9% - which is the best year-over-year growth rate since the 4th quarter of 2021 – when companies were starting to recover from pandemic lockdowns. The impressive earnings growth has been central to aiding market valuations which are pricey by historical standards.
As for cryptos...
Digital currencies were choppy again last week for a fourth straight week following the massive post-election Trump rally. President Trump, a crypto advocate, launched his own “Official Trump” digital currency recently as did First Lady Melania Trump under the “Melania” name. The administration has already signed an executive order for the purpose of creating a digital currency reserve for the US Treasury and has begun rolling back related regulations. Bitcoin was flat over the past week and remains 2% higher for the year, trading below $100,000. Ether was one of the better performers last week, +5%, after a brutal start to the year that still leaves it 17% lower on the year. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies, was 3% higher on the week and is 6% lower on the year.
I can’t provide any value analysis for digital 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 the benchmark.
- S&P 500 P\E: 30.59
- S&P 500 avg. PE: 16.13
The downside risk is 47% based on earnings multiples right now from current levels – higher than a week ago as stock prices improved faster than fundamentals. We have a cycle with 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.