How low can stocks go? Updated risks and values – December 4th

How low can stocks go? Updated risks and values – December 4th 

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

  • DOW: off 4.2%                      
  • S&P 500: off 5.1%             
  • Nasdaq: off 8.5%             

After a huge week of 4% plus gains across the board, all three are back out of correction territory and the Dow is suddenly closer to an all-time again than correction territory. It’s a reminder about attempting to time the market. Swings happen fast and if you make mistakes timing on the way down and up it’ll cost you almost all of the gains the market has to offer.  

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

  • The Dow is higher by 4.5%, the S&P 500 is higher by 4.4% & the Nasdaq is up 7.8%                    

Not bad for a year that’s included two corrections is it? As a reminder I mentioned that with fundamentals and earnings coming in so strong – I was becoming more optimistic in the face of the correction and selling – not the opposite. That’s why pragmatism and fundamentals matter so much. That’s also why I do this weekly update. 

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: 22.78          
  • S&P 500 avg. P\E: 15.73                

The downside risk is 31% based on earnings multiples right now from current levels. That's 8% less risk compared with this time last year and 3% more risk than a week ago. Companies are actually still near 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 (31%) 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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