How low can stocks go? Updated risks and values February 19th
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%
- S&P 500: off 6%
- Nasdaq: off 8%
After another week of outstanding gains for stocks on back of the budget deal, developments with China trade talks and excellent earnings – stocks are firmly out of correction territory. The DOW is now closer to all-time highs than a correction and the Nasdaq made its way out for the first time since last fall. As for where we stand for 2019? Not only was it the best January to start a year since 1987 for stocks...
- The Dow is up by 11%, the S&P 500 is up by 11% & the Nasdaq is up 13%
Those are above average returns for an entire year that we’ve locked in already in 2019! 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: 21.28
- S&P 500 avg. P\E: 15.74
The downside risk is 26% based on earnings multiples right now from current levels. That's 13% 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 (26%) 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).