How low can stocks go? Updated risks and values – June 4th
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 8%
- S&P 500: off 7%
- Nasdaq: off 10%
And we’re back into correction mode with one of the three major indexes. From Chinese checkers to Mexican jumping beans the traders are nervous about where these trade standoffs are going. But should you be? That’s the point of this story. First, despite the recent negativity we’re still posting gains for the year.
We’ve still had a great start to the year. Year to date...
- The Dow is up by 6%, the S&P 500 is up by 10% & the Nasdaq is up 11%
Those are still nice gains for the year. As long as fundamentals and the economy remain strong, selling makes me more optimistic as more value is created with those dips in prices. On a personal note I have been buying over the past week. If we end up in a recession, it’s probably not a good idea. Provided we don’t there’s a lot of value being created.
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: 20.36
- S&P 500 avg. P\E: 15.75
The downside risk is 23% based on earnings multiples right now from current levels. That's 17% less risk compared with this time last year. I’ll repeat, 17%! That’s not a little. That’s a lot of additional value in the market if you don’t think we’re heading straight into a recession that’ll collapse future earnings. And that’s part of what’s so exciting 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. In fact, right now this is the best overall relative value I’ve measured for stocks since 2014. I’m actively putting additional money to work right now myself. To the question itself, how low can stocks go?
I don't expect a 23% sell off but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at those 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.