How low can stocks go? Updated risks and values for April 3rd
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 11.2%
S&P 500: off 10.1%
Nasdaq: off 10%
Well April started off with a bang. Maybe not the one you were hoping for but a bang nevertheless that resulted in each of the major indexes closing in correction territory for the first time at the same time. Here's the thing. It's an important thing. What's changed? Stock prices...that's it. 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 down 4.4%, the S&P 500 is down 3.4% & the Nasdaq is down .5%
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: 24.11
S&P 500 avg. P\E: 15.7
The downside risk is 35% based on earnings multiples right now from current levels. That's 5% less risk compared with this time last year on a fundamental basis alone. We're seeing earnings season once again deliver & with the recent selloff the fundamental story hasn't changed – valuations are just lower.
Now, as always, I don't expect that type of selloff to occur (35%) 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).