How low can stocks go? Updated risks and values – January 25th
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%
- S&P 500: within 1%
- Nasdaq: record high
Stocks are essentially back to record highs as earnings season is underway and with about 13% of companies reporting – a remarkable 86% have exceeded earnings expectations. We’ve continued to see the tale of two economies play out with large companies which have generally benefitted by the disruptions of the pandemic, while generally small and local businesses have been crushed. Should earnings hold up at these levels throughout the season it will go a long way towards justifying the lofty prices of stocks heading into it. Guidance along with record debt stimulus could also ward off concerns of a double-dip recession for now.
Here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 38.71
- S&P 500 avg. P\E: 15.88
The downside risk is 59% based on earnings multiples right now from current levels. That's 21% 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 59% 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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