How low can stocks go? Updated risks and values – November 2nd

Stock market

How low can stocks go? Updated risks and values – November 2nd

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: 10% from record highs
  • S&P 500: 9% from record highs
  • Nasdaq: 10% from record highs

Election related fears, along with corona relief talks being stalled due to the election led to a strong down draft over the past week – leaving the DOW and Nasdaq back in correction territory. The election has overpowered record economic growth in the third quarter – which was 33.1% and a great earnings season in which 86% of companies have exceeded their earnings expectations (due to that record growth). It’s clear a V-shaped recovery is real. But still the election. Markets are forward looking and the vision is so starkly different based on the parties and candidates that visibility is nil until we have results. Here’s what we know, there will be huge volatility this week, be prepared for it. What we don’t know is the extent of it will be. That depends on not only who wins the Presidential Election but also what control of Congress looks like as well. And on that note... 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.

Here’s where the markets stand year to date.

  • The Dow down 7%, the S&P 500 up 1% & the Nasdaq is up 22%

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: 32.95
  • S&P 500 avg. P\E: 15.85

The downside risk (if the near-worst case outcome for the economy/markets occurred) rose to 52% based on earnings multiples right now from current levels. Stocks are 14% more expensive than a year ago on fundamental basis. It’s clear there’s a lot of risk back into the market currently. It's always important to ensure that you're positioned for negative adversity. If a 52% 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.

Photo Credit: Getty Images

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