How low can stocks go? Updated risks and values – November 5th
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: Record high
- S&P 500: Record high
- Nasdaq: Record high
There are two sides to stories and one side to facts. All throughout this year, going back to the partial government shutdown in January when stocks were 20% off all-time highs, I’ve indicated that the real economy is booming. Record employment. Record wages. Record opportunity. Nothing about that ever spelled anything other than record performance for American companies. It’s just that over the near-term bogus headlines and poor analysis (which is common and often politically motivated) can lead to different outcomes for stock prices. Overtime pragmatism and fundamentals always win and rise to the top.
Fresh off a stellar jobs report that was much better than expected, after the 3rd quarter GDP report that was much better than expected, 80% of companies have exceeded their earnings expectations as well. The analysts were wrong, way wrong about the economy. They were equally wrong about the impact of the Chinese trade standoff. For now, there’s zero chance for negative economic growth and in fact there’s evidence the economy is currently strengthening and will finish 2019 with the best growth of the year.
Year to date...
- The Dow is up 18%, the S&P 500 is up 23% & the Nasdaq is up 27%
Those are two plus 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 18% to 27% 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: 22.91
- S&P 500 avg. P\E: 15.76
The downside risk is 31% based on earnings multiples right now from current levels. That's 7% 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 31% 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.