How low can stocks go? Updated risks and values

posted by Brian Mudd - 

How low can stocks go? Updated risks and values for August 21st 

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 3.2%        

  • S&P 500: off >1%        

  • Nasdaq: off 1.2%        

Markets were mixed over the past week as markets continued to digest record earnings and good economic reports with a very mixed bag geopolitically (Turkey, Venezuela, etc.). 

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

  • The Dow is up 4.2%, the S&P 500 is up 6.9% & the Nasdaq is up 13.3%        

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: 24.75      

  • S&P 500 avg. P\E: 15.72        

The downside risk is 36% 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 two weeks 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 (36%) 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).  

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