How low can stocks go? Updated risks and values – December 10th
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% off record high
- S&P 500: 1% off record high
- Nasdaq: 1% off record high
After a remarkable run in November we’re essentially flat thus far in December which is generally a great month for stocks. Last year’s 10% decline in December proved that’s not always the case. Every indication is that the economy is still super-strong. The Black Friday and Cyber Monday sales figures reinforce that point in spades after perhaps the most impressive jobs report in American history. It’s clear we’re finishing 2019 with real momentum and strength in the economy. The markets remaining intact near highs also tell you what investor sentiment is towards impeachment. The bottom line is that the market will react negatively to anything that would be perceived to be bad news for President Trump or that could negatively impact his ability to complete trade deals – especially with China. Meanwhile it’s been an incredible year for investors...
Year to date...
- The Dow is up 19%, the S&P 500 is up 24% & the Nasdaq is up 29%
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 19% to 29% 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: 23.07
- S&P 500 avg. P\E: 15.77
The downside risk is 33% based on earnings multiples right now from current levels. That's 5% 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 33% 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.