How low can stocks go? Updated risks and values – August 6th
Bottom Line: 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: 6%
- S&P 500: 6%
- Nasdaq: 7%
And just like that the threat of a Chinese trade war escalating has led to the worst week of the year. It’s worth noting that the tariffs don’t kick in until September 1st. It’s possible this is another head-fake like what happened in May leading into June when the tariff fears led markets lower before there wasn’t a June follow-through by China as originally feared. It’s also important to remember that many investors may be using this as an excuse/opportunity to realize profits after a great year to date. Despite the recent selloff stocks are still up double-digits for the year
Year to date...
- The Dow is up by 10%, the S&P 500 is up by 13% & the Nasdaq is up 16%
Those are well above average gains for a full year turned in already in 2019. This is a good time to check in on your investments. If your stock-based investments aren’t up by 10% to 16% at a minimum – you've been under-performing; you should figure out why...especially if you have a financial adviser that isn’t at least market average.
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: 21.16
- S&P 500 avg. P\E: 15.75
The downside risk is 26% based on earnings multiples right now from current levels. That's 12% less risk compared with this time last year. Stocks are still generally a far better value than they were a year ago. 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.
I don't expect a 26% selloff 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.