How low can stocks go? Updated risks and values – January 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: within 2%
- S&P 500: within 2%
- Nasdaq: within 2%
The market had its first negative week in a while as we’re getting ready to enter a period of significant political change which is hard to quantify at the moment. Since the Georgia Senate runoffs, investors in general have reacted to the likelihood of unprecedented amounts of stimulus flowing into the economy- boosting the bottom lines of companies in the near-term. That's helped lead stocks higher. But now we have a one-two punch of uncertainty, something investors generally don’t like. The first will be what earnings will look like as we enter reporting season and importantly, any guidance they provide going forward. Based on jobs data, we know the economy was sliding backwards again near year end. How big of a hit to revenue and earnings will that have been? What’s the real-time read on the economy? That takes us to the second consideration. Will the short-term boost of the debt spending stimulus be enough to counteract more stringent regulations, potential tax increases and policy like raising the federal minimum wage to $15 per hour? Those are all policies President-Elect Biden said are on the table immediately.
Here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 37.97
- S&P 500 avg. P\E: 15.88
The downside risk is 58% based on earnings multiples right now from current levels. That's 20% more risk compared with this time last year. The market is historically expensive right now. Stocks are clearly priced for earnings to rebound in 2021. It’s mostly like this. If the economy does recover as expected stock prices can be justified. If there’s a double-dip recession – hold your butt. There’s a lot of room for downside. That’s basically where we are right now.
It's always important to ensure that you're positioned for negative adversity. If a 58% 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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