How low can stocks go? Updated risks and values February 12th

How low can stocks go? Updated risks and values February 12th

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 7%                           
  • S&P 500: off 8%                  
  • Nasdaq: off 10%                 

After the sixth consecutive week of gains for stocks, the market turned in its best January since 1987 and only the Nasdaq is even near correction territory. Once again, the jobs report confirmed the economy is still firing in high gear and earnings season has been solid despite the concerns of analysts. 

  • The Dow is up by 7.4%, the S&P 500 is up by 8.1% & the Nasdaq is up 10.1%        

That’s about a good year’s worth of gains already achieved in the first month. Looks like a little making up for the last year slump the erased last year’s gains in the market. 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: 20.79               
  • S&P 500 avg. P\E: 15.73                     

The downside risk is 24% based on earnings multiples right now from current levels. That's 15% 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 (24%) 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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