How low can stocks go? Updated risks and values for February 27th

posted by Brian Mudd -

How low can stocks go? Updated risks and values for February 27th    

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: off 3.4% (up 1.8% vs last week)  

  • S&P 500: off 3.2% (up 1.7% vs last week)  

  • Nasdaq: off 1.1% (up 2.4% vs last week)  

If you were in a coma for the month of February and just woke up you'd never know what happened. We've had a correction (decline of 10% or more) in every major index - yet after two solid weeks in recovery you'd never know it. In fact, the Nasdaq is a good day away from all-time highs! This is all about the earnings power on display. As I shared with you yesterday - earnings have grown nearly 15% year over year to record levels - and the best is still yet to come as fundamentals are still improving and tax reform's impacts are just starting to be felt in the economy. This is a reminder of why it's so important to have a solid plan in place and not make emotional decisions. If you did and attempted to time the market you've probably made some very expensive mistakes.  

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

  • The Dow is up 4%, the S&P 500 is up 4% & the Nasdaq is up 7.5% 

Those are incredible returns already this year - especially when factoring in the correction. As far as how low stocks could go...? If only market fundamentals mattered here's what we'd want to consider regarding the S&P 500 for example.               

  • S&P 500 P\E: 26.96            

  • S&P 500 avg. P\E: 15.69               

The downside risk is 42% based on earnings multiples right now from current levels. That's 2% more risk compared with this time last year on a fundamental basis alone (and 3% more than last week). We're seeing earnings season once again deliver & with the recent selloff the fundamental story hasn't changed – valuations are just a touch lower. We still don't have the full impact of tax reform factored in.   

Now, as always, I don't expect that type of selloff to occur (42%) but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at the 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).     

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