How low can stocks go? Updated risks and values – July 9th

How low can stocks go? Updated risks and values – July 9th

Bottom Line: 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 >1%                           
  • S&P 500: off >1%          
  • Nasdaq: off >1%              

After reaching record highs during the abbreviated week for trading last week, stocks have backed off a touch the past couple of days as investors were surprised by the strength of the jobs report which lessens the likelihood of the Federal Reserve cutting interest rates as aggressively as most had anticipated this year. The good news is a strong jobs report means a healthier economy which is the best news of all. 

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

  • The Dow is up by 15%, the S&P 500 is up by 19% & the Nasdaq is up 22%        

Those are well above average gains for a full year turned in already and here we are just starting the second half of 2019. This is a good time to check in on your investments. If your stock-based investments aren’t up by 15% to 22% at a minimum – you've been under-performing, you should figure out why...especially if you have a financial adviser that isn’t at least market average. 

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: 22.15
  • S&P 500 avg. P\E: 15.75                     

The downside risk is 29% based on earnings multiples right now from current levels. That's 10% 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. 

I don't expect a 29% selloff 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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