How low can stocks go? Updated risks and values – May 19th
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: 17% off record high
- S&P 500: 13% off record high
- Nasdaq: 6% off record high
After a raging rally on Monday markets are 1% higher across the board over the past week. That subtle move higher hardly tells the story.It’s all about the v word. Late week pessimism last week was quickly forgotten when Moderna Therapeutics announced a vaccine trial that produced 100% successful results with the 45-person test group. Moderna has already been working with the National Institutes of Health on the trial so it’s been fast tracked to a July Phase 3 trial which if successful would allow for a vaccine to be produced for use to combat COVID-19. There’s a lot that needs to happen between here and there but the news couldn’t have been any better. Most recently stocks had mostly been drifting higher due to technology and the fed infusion of trillions of dollars into the financial markets. Moderna’s vaccine trial is only the second tangible developments towards a potential path forward beyond the virus (the first being the use of Remdisivr as a treatment).
Here’s where the markets stand year to date.
- The Dow is down 14%, the S&P 500 down 8% & the Nasdaq is up 3%
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: 21.18
- S&P 500 avg. P\E: 15.78
The downside risk is 25% based on earnings multiples right now from current levels. That's 8% less risk compared with this time last year, however fundamentals on trailing earnings will deteriorate. The market is priced as though earnings will only drop by about 8% this year. That might be a bit too optimistic. I’d prepare for the additional 25% drop at this point with a further reevaluation as earnings begin to roll in – just in case.
It's always important to ensure that you're positioned for negative adversity. If another 25% decline 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.