How low can stocks go? Updated risks and values for October 10th:
Bottom Line: In case you're new to this series, 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. 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: New high intra-day yesterday
S&P 500: within 1% of highs
Nasdaq: New high intra-day yesterday
What a year and what a ride it's been for stocks and continues to be... The Trump bump. Lower regulation. Record earnings. Low inflation. New highs set with regularity. All of this without even getting healthcare or tax reform (yet). All of this might be enough to make you nervous but consider this. Fundamentals have still performed better that stock prices. In other words, there's less risk in the stock market today than on January 1st.
The Dow is up 15.2% in 2017, the S&P 500 is up 13.7% & the Nasdaq has been the biggest winner up by 22.2%.
As far as how low stocks could go...If only market fundamentals mattered here's what we'd want to consider with regard to the S&P 500 for example.
S&P 500 P\E: 25.37
S&P 500 avg. P\E: 15.68
The downside risk is 38% based on earnings multiples right now from current levels. That's about 2% less risk than entering 2017 despite stocks having appreciated so significantly this year already. 2017 is proving the power of improved earnings. With the super-strong growth year over year, stock prices are meaningfully higher as compared to the start of 2017, yet risk has actually declined because fundamentals have improved faster than prices have risen. Now we're riding towards the third quarter earnings season. Will the ride of record earnings continue? Hint they need to if this ride is to continue.
Now, as always, I don't expect that type of selloff to occur (38%) but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at the aforementioned levels wouldn't affect your day-to-day life, you're likely well positioned to continue to take advantage of investment opportunities. If that size of selloff would rock your world over the short-term, that's when you should probably seek professional assistance in crafting your plan (that balances your short-term needs with long-term objectives).