How low can stocks go? Updated risks and values – May 7th
Bottom Line: In case you're new to this series, 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. I want you to benefit from it without making emotional mistakes with money.
Too often when we have a rare short-term downturn in the markets - it's too late to offer up information that might have been helpful ahead of time. This week's edition of "how low can stocks go" goes as follows...re the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: off 2%
- S&P 500: within 1%
- Nasdaq: within 1%
Stocks have reached record highs over the past week again and proved to be resilient in yesterday’s trading. After the DOW opened around 450 points lower yesterday, on fears of an escalation in the China trade standoff, stocks rallied back to close only slightly lower yesterday. Earnings season has been far better than expected, just as the US economy continues to out-perform and there’s reason to think that a continuation of the rally isn’t over with the recent data on jobs and wages.
Markets are essentially 20% higher than the lows in early January and have posted incredible returns already in 2019.
We’ve still had one of the best starts to a year ever. Year to date...
- The Dow is up by 13%, the S&P 500 is up by 17% & the Nasdaq is up 22%
Those are well above average returns for an entire year already in 2019. I’ve mentioned that fundamentally companies and the economy have remained strong. That made me more optimistic in the face of the correction and selling – not the opposite and that’s still true today. That’s why pragmatism and fundamentals matter so much. That’s also why I do this weekly update.
As far as how low stocks could go...? If only market fundamentals mattered here's what we'd want to consider regarding the S&P 500 for example.
- S&P 500 P\E: 22.2
- S&P 500 avg. P\E: 15.74
The downside risk is 29% based on earnings multiples right now from current levels. That's 10% less risk compared with this time last year. And that’s part of what’s so exiting here. Record stock prices. Incredible gains already in 2019, yet because earnings have grown significantly faster than stock prices – there's actually less fundamental risk – more value - in the market today than a year ago. That’s awesome sauce.
Now, as always, I don't expect that type of selloff to occur (29%) but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at the aforementioned levels wouldn't affect your day-to-day life, you're likely well positioned to continue to take advantage of investment opportunities. If that size of selloff would rock your world over the short-term, that's when you should probably seek professional assistance in crafting your plan (that balances your short-term needs with long term objectives).