How low can stocks go? Updated risks and values – June 9th

How low can stocks go? Updated risks and values – June 9th

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: 6.8% off record high
  • S&P 500: 4.7% off record high
  • Nasdaq: Record high

The performance of the stock market has been stunning over the past week. On back of the last week’s jobs report showing the possibility of a V shaped recovery after all – investors jumped on the momentum train. It’s remarkable to think about the whipsaw effect of markets having dipped more than 30% in less than a month in March only to have the Nasdaq at record highs today and the DOW and S&P 500 only mid-single digits away. This reinforces my first rule of money. Never to let your money and emotions cross paths. It’s also the very reason I do this weekly update. Now for a bit of a reality check. Why is it that stocks are near highs when unemployment is at 13% compared to 3% before the pandemic? 

Investors had four trillion on the sidelines after the selloff in March looking for a place to go. With the Federal Reserve backstopping markets to the tune of another $6 trillion – the economic stimulus flowing into stocks has been record breaking and massive. Add in the potential of a V shaped recovery and whamo here we go.Of course, this type of rapid rise adds to the near-term risk in the markets should news start to go the other way. So,about that...

Here’s where the markets stand year to date.

  • The Dow is down 3%, the S&P 500 is flat& the Nasdaq is up 11%

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: 23.18
  • S&P 500 avg. P\E: 15.79

The downside risk is 32% based on earnings multiples right now from current levels. That's 5% 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 5% this year. That might be a bit too optimistic. I’d be prepared for worse, just in case.

It's always important to ensure that you're positioned for negative adversity. If another 32% 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.


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