How low can stocks go? Updated risks and values – July 30th
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 follows...re the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: >1%
- S&P 500: >1%
- Nasdaq: >1%
Earnings season has brought plenty of pleasant surprises and along with it, a series of new record highs for stocks. Adding to the confidence in the economy is Fridays’ GDP report showing consumer spending, which accounts for about 70% of the US economy, rock solid at over 4%. There’s plenty of reason to think we’re setup for a solid 3rd quarter and back half of the year with record low unemployment and record high wages. The question once again becomes about what the Federal Reserve will or won’t do this week. While many are still on fed watch...wondering – waiting to see if the Federal Reserve will cut rates, the fact remains...the economy is strong, and we have low inflation. That’s a good thing. So many are viewing low inflation as a sign something’s wrong. Those people have been left in the dust this year.
Year to date...
- The Dow is up by 17%, the S&P 500 is up by 21% & the Nasdaq is up 25%
Those are well above average gains for a full year turned in already in 2019. This is a good time to check in on your investments. If your stock-based investments aren’t up by 17% to 25% 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: 22.48
- S&P 500 avg. P\E: 15.75
The downside risk is 30% based on earnings multiples right now from current levels. That's 9% 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 30% 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.