How low can stocks go? Updated risks and values for May 15th
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 6.5%
S&P 500: off 5%
Nasdaq: off 3%
Markets were higher across the board for the second straight week led by earnings and foreign policy progress by the Trump administration. In fact, the Dow now has an eight-day winning streak – the best since last September...markets are also now higher for the year. The question is whether fundamentals will drive the market in the short term or if noise of the day will win out. The past couple of weeks it's been fundamentals.
Here's the 2018 year-to-date performance:
The Dow is up .7%, the S&P 500 is up 2.1% & the Nasdaq is up 7.4%
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: 24.85
S&P 500 avg. P\E: 15.7
The downside risk is 37% based on earnings multiples right now from current levels. That's 3% less risk compared with this time last year on a fundamental basis alone and 2% above a week ago. 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 (37%) 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).