How low can stocks go? Updated risks and values for May 8th

posted by Brian Mudd - 

How low can stocks go? Updated risks and values for May 8th            

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 8.5%         

  • S&P 500: off 7%         

  • Nasdaq: off 4.9%         

Markets were higher across the board over the past week led by earnings and then Warren Buffet Apple barren news. Apple breaking out to all-time highs on back of Warren Buffet's bullish take on the markets aided an already strong earnings picture. The question is whether fundamentals will drive the market in the short term or if noise of the day will win out.    

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

  • The Dow is down 1.5%, the S&P 500 is flat & the Nasdaq is up 5.3%          

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                    

  • 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 and about flat with a week ago. But markets are higher so how could the market not be any more expensive? 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).  

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