How low will stocks go? Updated risks and values – September 28th

How low will stocks go? Updated risks and values – September 28th

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: 8% from record highs
  • S&P 500: 8% from record highs
  • Nasdaq: 10% from record highs

Stocks were generally flat to lower for a second consecutive week which leaves the Nasdaq and its technology companies right around correction territory (a decline of 10% or more). Recent stock valuations have been the highest in over a decade - so a correction is expected. The question is, where do markets go from here? With the Election now only five weeks away – polls and the debates could move the markets as much as fundamentals. It’s not complicated. Investors would greatly prefer Trump over Biden. Expect markets to move accordingly in anticipation of November 3rd based on news and polls of the day.

Over the short-term 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.

Here’s where the markets stand year to date.

  • The Dow is down 5%, the S&P 500 up 1% & the Nasdaq is up 21%

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: 28.35
  • S&P 500 avg. P\E: 15.82

The downside risk (if the near-worst case outcome for the economy/markets occurred) remains 44% based on earnings multiples right now from current levels. Stocks are 7% more expensive than a year ago on fundamental basis. It's always important to ensure that you're positioned for negative adversity. If a 44% 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.

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