How low can stocks go? Updated risks and values – January 7th
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: within 1% of record high
- S&P 500: within 1% of record high
- Nasdaq: 1% off record high
2019 was nothing short of amazing with average gains between 22% to 35% once again demonstrating the power of the US economy and American semi-free enterprise when given an opportunity by the government to thrive. What you’ve seen for the past three years with stocks have provided record returns, is the one-two punch of eliminating onerous regulations at the federal level along with the tax cuts putting more money into the hands of all of us. In the early going in 2020 we’ve had volatility but we’re currently sitting on gains across the board.
Year to date...
- The Dow is up 1%, the S&P 500 is up 1% & the Nasdaq is up 1%
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: 24.32
- S&P 500 avg. P\E: 15.77
The downside risk is 35% based on earnings multiples right now from current levels. That's 1% less risk compared with this time last year. Stocks are still generally a slightly better value than they were a year ago,though they’re no longer cheap. We ended 2019 with the highest relative valuations since January of last year as investors realized the economy is very much intact and likely gaining strength entering 2020. Despite the gains in 2019, fundamentals have improved faster than stock prices. There’s still more value in the market today than even a year ago, despite the incredible gains based on earnings.
I don't expect a 35% 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.