How low can stocks go? Updated risks and values – June 16th
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: 13% off record high
- S&P 500: 10% off record high
- Nasdaq: 4% off record high (set last week)
What a difference a week makes. A week ago, markets were at their highest levels since the pandemic selloff began – including the Nasdaq sitting at a record high. Despite a strong comeback rally yesterday, that’s clearly no longer the case. In fact, the Dow & S&P 500 are back into what’d usually be considered correction territory. And let’s be clear, the fear of a rise in COVID-19 cases, which has been mostly behind the recent selling, is a real concern. We still don’t really have a firm grasp on what the real economy looks like, whether the recovery has caught hold and if we’ll continue the process of reopening nationwide. It’s worth noting that no state is fully reopened as of now. Even if we don’t go backwards into lockdowns, it appears continued reopening efforts in select cities, like Miami – will slow.
Last week I mentioned there was the most fundamental risk baked into the stock market since prior to the pandemic. Stocks certainly have behaved that way and that’s why I continue to bring you this fundamental view of the possible, which has held every step of the way through the pandemic. At the point when there was only 6% fundamental risk left in the market in March, we bottomed. Last week when it stood at 32%, we sold off. We are we right now?
Here’s where the markets stand year to date.
- The Dow is down 10%, the S&P 500 is down 5% & the Nasdaq is up 8%
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: 21.99
- S&P 500 avg. P\E: 15.79
The downside risk is 28% based on earnings multiples right now from current levels. That's 4% less risk compared with a week ago and seven percent lower than a year ago, however fundamentals on trailing earnings will deteriorate. The market is priced as though earnings will only drop by about 7% this year. That might be a bit too optimistic. I’d be prepared for worse, just in case.
It's always important to ensure that you're positioned for negative adversity. If another 28% decline 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.