How low can stocks go? Updated risks and values – March 17th

How low can stocks go? Updated risks and values – March 17th

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 the Dow, S&P 500 & Nasdaq stand against their all-time high levels:                           

  • DOW: 32% off record high
  • S&P 500: 30% off record high
  • Nasdaq: 30% off record high

We’re coming off of the worst points day in DOW history and the biggest percentage decline since 1987. Fear has hit for many. Still perspective is key. Despite everything that’s happened during this selloff, prices are only back to levels last seen in December of 2018 or May of 2017 based on the index. Having a long-range view is important when talking about the market. Selling accelerated over the past week as reality set in and investors priced in the likelihood that we’ll enter recession due to the virus. Uncertainty is met with selling but what’s now begun to play out is closer to the worst-case scenario. That suggests we’re likely closer to a bottom than not, despite not knowing when or how life will resume as usual. 

Year to date...

  • The Dow is down 29%, the S&P 500 down 26% & the Nasdaq is down 23%

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: 17.95
  • S&P 500 avg. P\E: 15.78

The downside risk is 12% based on earnings multiples right now from current levels. That's 19% less risk compared with this time last year. Based on trailing earnings the market is the best relative value we’ve had in nearly a decade. That may not hold if earnings erode meaningfully for the rest of the year, but stocks have now generally priced in that likelihood.

I don't necessarily expect another 12% 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.

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