​How low can stocks go? Updated risks and values for January 16th

How low can stocks go? Updated risks and values for January 16th:         

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: All time high   

  • S&P 500: All time high  

  • Nasdaq: All time high    

2018 has picked up where 2017 left off. After gains averaging about 20% to 30% we're not seeing any signs of selling. In fact, the S&P 500 is off to its best start to a year in fifteen years (2003). With 3%+ economic growth. Record earnings, tax reform, the end of the individual mandate. There's been endless room for optimism. Last week I shared the incredibly important point for those who're worried about valuations. Stock prices were no more expensive to start 2018 then they were at the start of 2017. How you ask? Because stock prices have only risen in conjunction with improved earnings performance.   

Here's the 2018 year-to-date performance:   

The Dow is up 4.4%, the S&P 500 is up 4.2% & the Nasdaq is up another 5.2%. That's a heck of a run to start the year. 

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: 26.8        

  • S&P 500 avg. P\E: 15.69         

The downside risk is 41% based on earnings multiples right now from current levels. That's 1% more risk compared with this time last year on a fundamental basis alone. It's clear that investors are anticipating a great earnings season with continued economic momentum and the benefit of tax reform that's expected to help most companies. For the S&P 500 specifically, the average tax rate was about 26% last year. With tax reform cutting corporate rates to 21% - that's another 5% to the bottom line on average.  

2017 proved the power of improved earnings. With the super-strong growth year over year, stock prices are meaningfully higher as compared to this time last year, yet risk hasn't changed much because fundamentals are improving as fast as prices. The most common question I'm asked is when this will end. While short-term movements are unpredictable, the longer term fundamental story has only continued to improve. As long as that's the case, you probably have your answer... 

Now, as always, I don't expect that type of selloff to occur (41%) 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).   


Sponsored Content

Sponsored Content