How low can stocks go? Updated risks and values for July 31st
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 4.9%
S&P 500: off 2.4%
Nasdaq: off 3.8%
Markets were mixed over the past week with the Nasdaq having its worst three day run since it corrected in March. The Nasdaq's had an incredible run this year – especially off of its lows but the Facebook earnings debacle has led to broader profit taking with select technology companies.
Here's the 2018 year-to-date performance:
The Dow is up 2.4%, the S&P 500 is up 4.8% & the Nasdaq is up 10.5%
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: 24.28
S&P 500 avg. P\E: 15.71
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 flat a week ago. Earnings have continued to grow faster than stock prices over the past year.
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 aforementioned 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).