How low can stocks go? Updated risks and values – January 8th
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 12.7%
- S&P 500: off 13.2%
- Nasdaq: off 16.1%
This is the first update I’ve provided in a month due to vacation and holidays. A little bit of action’s happened since then hasn’t it? Here we are with all indexes out of bear market territory, a decline of 20% or more, but still sitting solidly in correction territory. But what’s really changed? During my vacay I did a deep dive into over 100 companies I track to see if there really was something fundamentally different in the economy that I’d missed or if this was simply an investor driven selloff. During my research there were no companies that had deteriorating fundamentals during the month. Six of the companies actually had improving fundamentals, while the rest were performing just as well as they had been generally. In other words, nothing wrong with the economy. Sure enough, the jobs report laid to waste any notion of anything other than a healthy economy.
Here's the 2019 year-to-date performance:
The Dow is up by 1%, the S&P 500 is up by 1.7% & the Nasdaq is up 2.8%
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: 19.55
- S&P 500 avg. P\E: 15.73
The downside risk is 20% based on earnings multiples right now from current levels. That's 19% less risk compared with this time last year. Companies are currently near the best overall value they’ve been fundamentally since the end of the Great Recession.
Now, as always, I don't expect that type of selloff to occur (20%) 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).