How Low Can Stocks Go? Updated Risks & Values – November 9th, 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: All-time high, +19% YTD
- S&P 500: within 1% of new high, +25% YTD
- Nasdaq: within 1% of new high, +24% YTD
All-time highs are everywhere for the second straight week. Awesome earnings and the bi-partisan infrastructure deal have helped markets climb to new highs yet again. This while shrugging off the Federal Reserve’s decision to begin to taper bond purchases, which is the first step towards taking some liquidity out of the markets. But back to earnings. With over 89% of companies having reported, 81% of companies have exceeded expectations and the average beat has been meaningful – 10% above expectations. We’re on track for the fourth best earnings season relative to expectations on record.
As for cryptos over the past week, the biggest players a la Bitcoin, pushed higher as well with Bitcoin most recently checking in just north of $66,000. Conversation of Bitcoin being a hedge against inflation continues to grow in financial circles and appears to be replacing gold in that regard with many investors. As for the question itself. How low can stocks go?
Here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 29.62
- S&P 500 avg. P\E: 15.95
The downside risk is 46% based on earnings multiples right now from current levels. That’s one percent more risk than a week ago, however it’s 9% lower than at the recent highs due to improved earnings. 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 46% 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 is a problem for you, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.