How low can stocks go? Updated risks and values – August 27th
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: 5%
- S&P 500: 5%
- Nasdaq: 6%
The roller coaster ride continues. Which way will the trade winds blow today? Here’s the thing. For most investors paying attention to stocks day-to-day the decline from the highs probably “feels” worse than about five percent. That’s because recent 800 and 600 point declines tend to do that to you. We’re about as close to all-time highs as we are to correction territory. And here’s the thing. The China trade stuff does matter for three very meaningful reasons. First, the uncertainty is causing business activity to pause for impacted businesses. About 20% of the US economy is business spending. Any unplanned slowdown could negatively impact the economy. That takes us to the second reason. Tariff increases are set to take effect this weekend without any policy change. That’s not good for China’s economy or ours. Third, and most importantly it’s about us. Consumer confidence and spending are key. If we become fickle and stop spending to the extent we’ve been doing – that could make the biggest impact of all with 70% of the US economy being comprised of consumer spending.
On the plus side, maybe we are closer to a trade deal? And in the meantime, we have near record low mortgage rates once again. Housing had stalled about over the past year – that's likely changing right now. Stocks remain up double-digits for the year
Year to date...
- The Dow is up by 12%, the S&P 500 is up by 15% & the Nasdaq is up 19%
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 12% to 19% 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: 21.42
- S&P 500 avg. P\E: 15.76
The downside risk is 26% based on earnings multiples right now from current levels. That's 11% 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.