How low can stocks go? Updated risks and values – October 29th
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: New high
- Nasdaq: >under 1%
As we close in on the halfway point of earnings season there are a couple of significant takeaways that led the S&P 500 to a record high yesterday and has the DOW and Nasdaq a good day away as well. 80% of companies have exceeded their earnings expectations and well over 60% their sales estimates as well. In other words, the analysts were wrong, way wrong about the economy. They were equally wrong about the impact of the Chinese trade standoff. This week is an important one with 3rd quarter economic growth being reported Wednesday along with jobs numbers. For now, there’s zero chance for negative economic growth given the health of earnings. There’s nothing about record performance for stocks, which are leading indicators, that suggests recession.
Over the short-term anything can happen in the markets. Overtime reality and pragmatism wins. Stocks remain up double-digits for the year.
Year to date...
- The Dow is up 16%, the S&P 500 is up 21% & the Nasdaq is up 25%
Those are two years' worth of gains packed into 2019 already. This is a good time to check in on your investments. If your stock-based investments aren’t up by 16% 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: 22.61
- S&P 500 avg. P\E: 15.76
The downside risk is 30% based on earnings multiples right now from current levels. That's 8% 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.