How low can stocks go? Updated risks and values – March 15th, 2021
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: Record high
- S&P 500: within 1%
- Nasdaq: off 6%
The passage of the stimulus package helped the DOW and S&P 500 rip higher over the past week extending gains and hitting new highs in the process. What’s more is the level of interest and participation with stocks continues to grow - in fact aside from the near two trillion dollars of debt spending hitting the economy – having an impact on economics – a lot of the stimulus checks will find their way into the market through stock-based investments. A study by Duetsche Bank found 61% active traders are under 34 and a majority of them intended to use at least a portion of the stimulus money to invest/trade. In other words, there’s big momentum behind the rally in stocks, this side of the recent selloff in technology stocks, and lofty expectations for earnings the rest of the year.
As we enter this week here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 40.15
- S&P 500 avg. P\E: 15.91
The downside risk is 60% based on earnings multiples right now from current levels. That's 54% more risk compared with this time last year. The difference is so stark in part because the market was in the throws of the short-lived market crash over pandemic fears a year ago today. Regardless, the market remains historically expensive right now. Stocks are clearly priced for earnings to continue to rebound in 2021. If the economy does continue to recover as expected, stock prices can be justified. If there’s a double-dip recession – hold your butt. That looks like it's off the table for now but if rates head higher quickly, that would have the potential to quickly change the conversation. There’s a lot of room for downside. That’s basically where we are right now.
It's always important to ensure that you're positioned for negative adversity. If a 60% 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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