How low can stocks go? Updated risks and values – October 6th

How low can stocks go? Updated risks and values – October 6th

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: 5% from record highs
  • S&P 500: 5% from record highs
  • Nasdaq: 6% from record highs

The past week has been a classic case of assumptions being anything but wise and how often conventional wisdom is wrong. What do I mean? How many would have suspected that we’d have a Presidential debate viewed to be nearly unwatchable by the masses along with President Trump being diagnosed with COVID-19 and the market would be up 3%? But then again maybe this market is telling you something that the polls aren’t.

We’re a month away from Election Day. Polls and the debates could move the markets as much or more as fundamentals from now to then. 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. That’s the message I’ve been sharing with you for two weeks. The market’s movement might be signaling good news for the president (aside from the fact that President Trump performs best on the economy).

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 2%, the S&P 500 up 4% & the Nasdaq is up 24%

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: 29.30
  • S&P 500 avg. P\E: 15.82

The downside risk (if the near-worst case outcome for the economy/markets occurred) remains 46% based on earnings multiples right now from current levels. Stocks are 8% more expensive than a year ago on fundamental basis. It's always important to ensure that you're positioned for negative adversity. If a 46% 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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