How low can stocks go? Updated risks and values – February 18th
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: within 1% of record high
- S&P 500: within 1% of record high
- Nasdaq: within 1% of record high
Even the coronavirus fears couldn’t stand in the way of stocks over the past week as the major averages were generally higher again, each reaching new records during the past week. It’s not complicated. The US economy has reaccelerated. The jobs picture is providing record opportunity. We have record wages that are accelerating. It’s really remarkable. And earnings season isn’t disappointing either as 71% of companies have exceeded expectations. There's a lot to feel good about this side of Chinese-born viruses– which itself isn’t all a bad thing in terms of economic policy. China rolled back tariffs on US goods as promised on Friday and is eager to begin the phase two trade talks. The harm caused to China’s economy has only increased their need for positive catalysts and the US’s trade position with them.To be continued...
Year to date...
- The Dow is up 3%, the S&P 500 is up 5% & the Nasdaq is up 8%
Great gains in the making already in 2020. This after the 30% run last year. 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: 25.43
- S&P 500 avg. P\E: 15.78
The downside risk is 38% based on earnings multiples right now from current levels. That's 9% more risk compared with this time last year. The market isn’t cheap at these levels and that’s part of the reason why more negative volatility is possible. Stocks aren’t cheap so earnings growth needs to occur. Anything that’s perceived to hurt earnings is likely to be met with selling as we’ve seen.
I don't expect a 38% 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.