How low can stocks go? Updated risks and values for May 22nd

posted by Brian Mudd -

How low can stocks go? Updated risks and values for May 22nd             

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%           

  • S&P 500: off 4.8%           

  • Nasdaq: off 3.2%           

Markets have been mixed to slightly higher over the past week as earnings season wraps up and on back of the positive China trade news over the weekend. Speaking of earnings, they've been amazing. Through Friday with well over 90% of companies reporting for the 1st quarter – earnings growth has averaged an incredibly impressive 24.5%. All major indexes are also in positive territory for the year as the DOW closed above 25,000 yesterday for the first time since March. 

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

  • The Dow is up 1.2%, the S&P 500 is up 2.2% & the Nasdaq is up 7.1%            

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: 24.87                      

  • 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 flat with a week ago. We're seeing earnings season once again deliver and though stock prices are solidly higher than a year ago we've seen earnings rise even faster than stock prices. 

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).   

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