How low can stocks go? Updated risks and values – February 8th, 2021
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: Record high
- Nasdaq: Record high
A week ago, the story in the stock market was GameStop as it entered the week at $325 per share on back of the populist movement to crush the hedge funds. A week later, at $66 per share, we’re reminded that over the short-term anything can happen. In the end, it’s fundamentals that will always matter most. That cautionary tale is an example of why I put together this weekly analysis. So you can separate irrational behavior from reality while separating your emotions from your money. The reason stocks are essentially at record highs, is due primary to earnings season which has been outstanding so far. With over half of all companies reporting earnings, 81% of companies have exceeded expectations while earnings are averaging a near 2% growth rate year over year. Earnings were expected to decline by more than 9%. This is huge outperformance by Americans companies.
Here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 39.57
- S&P 500 avg. P\E: 15.88
The downside risk is 60% 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 60% 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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