How Low Can Stocks Go? Updated Risks & Values – September 20th, 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. My first rule of money is to never let your money and emotions cross paths. That’s what this is about, an analytical evaluation of the stock market.
Here's where the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: 3% off recent highs
- S&P 500: 2% off recent highs
- Nasdaq: 2% off recent highs
Stocks were flat last week, which was an improvement over the previous two. September is historically the worst month for stock market performance. With an average annual loss of nearly 1%, it’s been the most likely time for corrections (a decline of 10% or more) or even bear markets (a decline of 20% or more) to occur. With markets having rallied hard this year, the S&P 500’s total return is 19% year-to-date, and valuations rather pricey from a historical perspective, many investors have started taking some money to the sidelines. Especially given the concerns regarding COVID variants, unknowns regarding vaccine duration and efficacy against all variants along with a slowing US economy. On the other side of the coin, just as Florida led the country’s trend higher with new COVID-19 cases during the summer surge, Florida’s leading the country lower as we’re about to officially close out summer.
The bottom line is this. There are reasons to pull money off the table if you’re looking for them, but otherwise there are pockets of value with overlooked companies who’ve been overshadowed much of this year, like financials, which produced the best returns of any industry last week. Many investors who don’t want to get out of the market are diversifying with more defensive value plays.
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: 34.58
- S&P 500 avg. P\E: 15.95
The downside risk is 54% based on earnings multiples right now from current levels. That’s flat with a week ago and it’s 11% lower than at the recent highs from where valuations were entering the prior earnings season. That’s the power of improved earnings, helping to justify stock prices which also mitigates risk. It's always important to ensure that you're positioned for negative adversity. I don’t expect anywhere near a 54% decline, however in theory it’s possible if the near worst case outcomes occurred. If a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If that would be a problem for you, should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.