How Low Can Stocks Go? Updated Risks & Values – June 1st, 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: 2% off
- S&P 500: within 1%
- Nasdaq: 3% off
Stocks continued higher again last week as several retailers posted exceptional earnings illustrating continued strong consumer demand in the economy – despite the highest increase in consumer prices in 13 years. Also, job searches have begun to rise in states like Florida that have announced a cancelation of extended unemployment benefits. This illustrates the point made by governors, like Ron DeSantis, who've said the extended benefits had been disincentivizing work. It also provides hope that there could still be another leg up in the economy as these individuals go back to work and companies which have been shorthanded are able to meet their needs.
Stocks remain in high-risk, high-reward mode coming out of the pandemic. Earnings delivered with the highest year over year growth since 2011 and if inflation doesn’t suck the wind out of the economy there’s room for optimism. If it does, there’s considerable room for downside.
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: 44.66
- S&P 500 avg. P\E: 15.94
The downside risk is 64% based on earnings multiples right now from current levels. That's 32% more risk compared with this time last year. The market remains historically expensive right now. Stocks are priced for earnings to continue to rebound. If the economy does continue to recover as expected, stock prices can be justified. If something were to come out of left field – there’s clearly 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 64% 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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