How low can stocks go? Updated risks and values – June 18th

How low can stocks go? Updated risks and values – June 18th

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 3%                           
  • S&P 500: off 2%                 
  • Nasdaq: off 4%              

We’ve been up, we’ve been down but over the past week – we've evened out to be just about exactly flat. Not bad after having turned in a terrific rally in the prior week to place us within striking distance of all-time highs. 

We’ve had a great start to the year. Year to date...

  • The Dow is up by 12%, the S&P 500 is up by 15% & the Nasdaq is up 18%        

Those are above average gains for a full 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. We’re on fed watch as many are looking for direction from a fed that’s now likely to cut rates, if not this week, then later this summer given that inflation has remained super low. 

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: 21.44
  • S&P 500 avg. P\E: 15.75                     

The downside risk is 27% based on earnings multiples right now from current levels. That's 12% less risk compared with this time last year. Stocks are still generally a far better value than they were a year ago. 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. To the question itself, how low can stocks go?

I don't expect a 27% 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.

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