How low can stocks go? Updated risks and values – October 30th

How low can stocks go? Updated risks and values – October 30th  

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 9.3%                  
  • S&P 500: off 10.2%         
  • Nasdaq: off 13.3%          

It’s been a rough week for investors with markets lower across the board, the S&P 500 and Nasdaq currently in correction territory (the Dow touched into correction territory before bouncing slightly) but against a backdrop of excellent earnings. On October 12th I mentioned I fully anticipated markets correcting before the month was up. Here we are. This is exactly why I do this you don’t make emotional mistakes with money.  

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

  • The Dow is lower by 1.1%, the S&P 500 is lower by 1.2% & the Nasdaq is up 2.1%                  

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: 21.56       
  • S&P 500 avg. P\E: 15.73            

The downside risk is 27% based on earnings multiples right now from current levels. That's 11% less risk compared with this time last year on a fundamental basis alone and 3% less risk than a week ago. Companies are actually the best overall value they’ve been fundamentally in over three years. 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 (27%) 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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