How low can stocks go? Updated risks and values – October 9th

How low can stocks go? Updated risks and values – October 9th 

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. The US stock market is the greatest wealth creation machine in the history of the world. I want you to benefit from it without making emotional mistakes with money.      

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 the Dow, S&P 500 & Nasdaq stand against their all-time high levels:               

  • DOW: off 1.7%               
  • S&P 500: off 1.9%      
  • Nasdaq: off 4.9%        

Markets have been a little spooked, not by Halloween around the corner but by rising interest rates and the adjustments that come to many portfolios that’re rebalancing due to higher rates on other investments, like government treasuries. With earnings season about to crank up the focus will begin to shift back to the bottom line of companies and guidance going forward. 

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

  • The Dow is up 7.2%, the S&P 500 is up 7.9% & the Nasdaq is up 12.1%               

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: 23.57      
  • S&P 500 avg. P\E: 15.72            

The downside risk is 33% based on earnings multiples right now from current levels. That's 6% less risk compared with this time last year on a fundamental basis alone. 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 (33%) 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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