How low can stocks go? Updated risks and values – February 25th
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: 5%off record high
- S&P 500: 5% off record high
- Nasdaq: 6% off record high
That escalated quickly. In a separate story today, I have a coronavirus update. It’s like this...The coronavirus is worse than any modern virus, there’s no preventative treatment and it’s not completely contained. In other words, it’s a bigger threat than a week ago and the markets reflect as much. The major indexes are all now more than halfway to correction territory and regardless of what does or doesn’t happen next with the coronavirus, don’t be surprised to see a correction happen. We’re due for one anyway and stocks weren’t and still aren’t exactly cheap.
Aside from the public health threat, what we still don’t know is what the impact will be on corporate earnings going forward. For most American multi-national companies there will almost certainly be a negative impact.The upshot, if you’re looking for market optimism, is the threat of the virus makes future rate cuts more likely, or at least any thought of raising rates taken off the table. Also, it ups the odds for a quicker phasing in of China trade phase two.
Year to date...
- The Dow is down 2%, the S&P 500 is flat & the Nasdaq is up 3%
Perspective is key isn’t it. After the 30% run last year and the recent selloff the market about flat for the year. Now exactly the end of the world is it?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: 24.27
- S&P 500 avg. P\E: 15.78
The downside risk is 35% based on earnings multiples right now from current levels. That's 6% more risk compared with this time last year. The market isn’t cheap at these levels and that’s part of the reason why more negative volatility is possible. Anything that’s perceived to hurt earnings is likely to be met with selling as we’ve seen.
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.