How low can stocks go? Updated risks and values for April 10th

posted by Brian Mudd - 

How low can stocks go? Updated risks and values for April 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: off 10%     

  • S&P 500: off 9%     

  • Nasdaq: off 9%     

Yesterday's four hundred plus point day evaporated inside of ten minutes before the close of trading as the FBI raid of President Trump's attorney's office looking for Stormy Daniels docs broke. Btw, how ridiculous does this sound? How desperate is the Special Council to get Trump? That's for another story. Anyway, this development not withstanding stocks are actually higher across the board over the past week and the S&P 500 and Nasdaq have moved slightly out of correction territory with the Dow sitting right at a correction. 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 3%, the S&P 500 is down 2.3% & the Nasdaq is up .7%      

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 34% based on earnings multiples right now from current levels. That's 6% 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 (34%) 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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