How low can stocks go? Updated risks and values – May 14th
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 6%
- S&P 500: off 5%
- Nasdaq: off 6%
What a difference a week makes. A week ago, stocks were essentially at record highs. Today they’re generally closer to correction territory than new highs. The Chinese trade fears have taken the market over the short-term by storm but is there an overreaction in the markets. Probably. Seasonally this is a time of year that many traders will step to the sidelines anyway and with the outstanding gains year to date heading into the Chinese trade tariffs it’s a good excuse to take profits. For longer term investors there’s plenty of opportunity being created.
We’ve still had a great start to the year. Year to date...
- The Dow is up by 9%, the S&P 500 is up by 12% & the Nasdaq is up 17%
Those are still solid returns for 2019 despite the thud in the market yesterday. I’ve mentioned that fundamentally companies and the economy have remained strong. That made me more optimistic in the face of the correction and selling in January and that’s still true today.
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: 21.24
- S&P 500 avg. P\E: 15.74
The downside risk is 26% based on earnings multiples right now from current levels. That's 12% less risk compared with this time last year. And that’s part of what’s so exiting here. Despite the gains in 2019, fundamentals have improved faster than stock prices. There’s considerably more value in the market today than even a year ago based on earnings.
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. If not, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.