How low can stocks go? Updated risks and values – May 28th
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 5%
- S&P 500: off 4%
- Nasdaq: off 7%
Over the past two weeks have stocks generally been higher or lower? The answer is flat to higher. For the second straight week we’ve seen volatility but not a of change at the end of it. Yes, there’s plenty of geo-political concern to go around but fundamentals and our economy are still strong. That matters most. Also, seasonally this is a time of year that many traders will step to the sidelines anyway. For longer term investors there’s plenty of opportunity being created.
We’ve still had a great start to the year. Year to date...
- The Dow is up by 10%, the S&P 500 is up by 13% & the Nasdaq is up 16%
As long as fundamentals and the economy remain strong, selling makes me more optimistic as more value is created with those dips in prices.
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: 20.98
- S&P 500 avg. P\E: 15.75
The downside risk is 25% based on earnings multiples right now from current levels. That's 13% less risk compared with this time last year. And that’s part of what’s so exciting here. Despite the gains in 2019, fundamentals have improved faster than stock prices. There’s considerably more value in the market today than even a year ago based on earnings. In fact, right now this is the best overall relative value I’ve measured for stocks since 2014. I’m actively putting additional money to work right now myself. To the question itself, how low can stocks go?
I don't expect a 25% sell off but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If not, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.