How low can stocks go? Updated risks and values – March 3rd
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: 10% off record high
- S&P 500: 9% off record high
- Nasdaq: 9% off record high
What we’ve experienced over the past week is exactly why I provide this update weekly. Even in an unprecedented week in which we saw the fastest correction, decline of 10% or more, on record – you should know what’s going on in context and what it means to you specifically. That’s what this is all about. We don’t know where the dust is going to settle on the fallout from the coronavirus but we can quantify the risk and value proposition in the market. A week ago, I mentioned the likelihood the market would correct on the coronavirus fears. I also mentioned I was actively buying Thursday, Friday and again yesterday. That’s the power of information and analytics over emotion. After the worst week for the market in history - with the fastest correction on record... We had the biggest day for the DOW in history yesterday.
With the markets having already been frothy, the correction was/is perfectly understandable. Aside from the public health threat, what we still don’t know is what the impact will be on corporate earnings going forward. That’s the most challenging part right now. 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. Also, it ups the odds for a quicker phasing in of China trade phase two.
Year to date...
- The Dow is down 6%, the S&P 500 down 6% & the Nasdaq is flat
Perspective is key isn’t it. After the 30% run last year and the recent selloff the market is up in the mid 20% range over the past 14 months. Not bad. 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: 23.25
- S&P 500 avg. P\E: 15.78
The downside risk is 32% based on earnings multiples right now from current levels. That's 1% more risk compared with this time last year.The correction and snap back yesterday have left us at about where we’d typically see the market based on trailing earnings. Without a lot of visibility going forward it’s the best we have to work with...
I don't expect a 32% 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.