How low can stocks go? Updated risks and values for January 2nd:
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: Within 1% of highs
S&P 500: Ditto
Nasdaq: Ditto
What a year 2017 turned out to be! 3%+ economic growth. Record earnings, tax reform, the end of the individual mandate. There's been endless room for optimism. Too much of a good thing might be enough to make you nervous but consider this. Fundamentals performed better than stock prices last year. In other words, there's less risk in the stock market today than on January 2nd 2017. First here's how stocks performed last year:
The Dow was up 25.1% in 2017, the S&P 500 was up 19.4% & the Nasdaq has been the biggest winner up by 28.2%.
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: 25.72
S&P 500 avg. P\E: 15.68
The downside risk is 39% based on earnings multiples right now from current levels. That's still 1% less risk than entering 2017 despite stocks having appreciated so significantly. 2017 proved 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 actually declined because fundamentals improved faster than prices rose last year
Now, as always, I don't expect that type of selloff to occur (39%) 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).