How low can stocks go? Updated risks and values – November 10th

How low can stocks go? Updated risks and values – November 10th

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: 3% from record highs
  • S&P 500: 3% from record highs
  • Nasdaq: 3% from record highs

The market rally since the contested election results rolled in last Tuesday has been impressive. Why? One belief. Gridlock. Investors like divided government in Washington and the belief is Republicans will hold onto the Senate with the special elections in January which would retain the Trump tax cuts and prevent subsequent increases from a Biden administration (should that come to be). Yesterday’s vaccine rally also provided another leg to the rally nearing record highs during the day before giving back a bit of ground by the end 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.

Here’s where the markets stand year to date.

  • The Dow is up 2%, the S&P 500 up 10% & the Nasdaq is up 31%

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: 35.81
  • S&P 500 avg. P\E: 15.86

The downside risk (if the near-worst case outcome for the economy/markets occurred) rose to 56% based on earnings multiples right now from current levels. Stocks are 19% 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 56% 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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