How low can stocks go? Updated risks and values – April 12th, 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: Record high
- S&P 500: Record high
- Nasdaq: off 2%
After a third consecutive week of strong gains by stocks the DOW & S&P 500 are at record highs and the Nasdaq has nearly fully recovered from the correction of a month ago. Investors have been betting on three major catalysts going forward... lots of money being pumped into the system through government action. Check, that’s happened. A sustained earnings recovery that will continue. To be determined, but the outlook remains positive for the economy. And that tax and regulatory policy out of Washington won’t be extreme. That’s currently the biggest wildcard, however West Virginia’s Joe Manchin’s statement last week saying under no circumstance will he support the weakening or elimination of the Senate filibuster was a huge relief to investors. That’s what’s created the goldilocks effect most recently.
As we enter this week here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 42.04
- S&P 500 avg. P\E: 15.92
The downside risk is 62% based on earnings multiples right now from current levels. That's 43% more risk compared with this time last year. The difference is so stark in part because the market was in the throes of the short-lived market crash over pandemic fears a year ago. Regardless, the market remains historically expensive right now. Stocks are clearly priced for earnings to continue to rebound in 2021. If the economy does continue to 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 62% 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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