How low can stocks go? Updated risks and values – June 23rd
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: 12% off record high
S&P 500: 8% off record high
Nasdaq: within 1% of a record high
Another week, more momentum buying and where we stop no one really knows. Stocks were generally higher across the board over the past week, driven by momentum, ongoing support from the Federal Reserve and the appearance that despite a resurgence in COVID-19 cases in states like Florida, California and Texas – no one is going backwards and shutting down again. That and people not really having other places to go with money. If it sounds like I don’t have a lot of confidence in the current rally – it's because I don’t exactly. Over the short term anything irrational selling and buying can and does take place in the stock market. In the end it comes down to fundamentals. As stock prices rise, it’s not necessarily because fundamentals are improving. It’s because of a hope that they will. Higher prices simply create more short-term risk if there’s a disappointment. That’s where we are right now.
We are we right now?
Here’s where the markets stand year to date.
- The Dow is down 8%, the S&P 500 is down 3% & the Nasdaq is up 11%
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: 22.36
- S&P 500 avg. P\E: 15.79
The downside risk is 29% based on earnings multiples right now from current levels. That's 1% more risk compared with a week ago though 6% percent lower than a year ago at this time, however fundamentals on trailing earnings will deteriorate. The market is priced as though earnings will only drop by about 6% this year. That’s not realistic in my view.
It's always important to ensure that you're positioned for negative adversity. If a 29% 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.