How low can stocks go? Updated risks and values – November 30th
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: within 1% of a record high
- S&P 500: within 1% of a record high
- Nasdaq: Record high
Optimism continues to abound with stocks. I recently said that if you were an alien beamed down to earth and were otherwise unaware about the rising COVID cases, the contested Presidential Election and the fate of control of the Senate likely to come down to two special elections to be decided in January, in Georgia – you might think life’s never been better on this planet. As we wrap up November, that remains the case.
In part, that’s true, for those who have remained employed and aren’t dealing with the impacts of the virus directly - life hasn’t better. Still, investors are making a number of assumptions right now with stock prices being anything but cheap. The first assumption, gridlock in Washington. 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). The second assumption, states won’t wholesale lockdown again and the third assumption is a bet on effective vaccines. If we do have divided government, if we don’t see lockdown fever kick in again and if we do soon have highly effective vaccines – the market’s action could be justified. Otherwise...there’s your risk. Speaking of which...
Here’s where the markets stand year to date.
- The Dow is up 5%, the S&P 500 up 13% & the Nasdaq is up 36%
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: 36.83
- S&P 500 avg. P\E: 15.86
The downside risk (if the near-worst case outcome for the economy/markets occurred) rose to 57% based on earnings multiples right now from current levels. Stocks are 20% more expensive than a year ago on fundamental basis. It’s clear there’s a lot of risk in the market currently. It's always important to ensure that you're positioned for negative adversity. If a 57% 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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