How low can stocks go? Updated risks and values – January 22nd

How low can stocks go? Updated risks and values – January 22nd     

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 8.3%                          
  • S&P 500: off 9.2%                 
  • Nasdaq: off 12%                 

The first week of earnings season helped continue the rally for stocks in 2019. It might not feel like it because 2018 ended with a thud, but we’re off to a great start for stocks this year. Also, notably, the DOW and S&P 500 are outside of correction territory – while the Nasdaq is still in a correction (declined of 10% or more). 

It’s telling that we’re a month into a partial government shutdown in the mist of a correction and the market is holding up so well. Here's the 2019 year-to-date performance:                          

  • The Dow is up by 5.9%, the S&P 500 is up by 6.5% & the Nasdaq is up 7.9%          

Not a bad start to a new year independent of the shutdown - in fact it's the best since 1987. And the reason comes down to value. I’ve mentioned that fundamentally companies and the economy have remained strong. Stocks prices are just lower with the correction. That made me 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: 20.49              
  • S&P 500 avg. P\E: 15.73                    

The downside risk is 23% based on earnings multiples right now from current levels. That's 16% 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 (23%) 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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