How low can stocks go? Updated risks and values – March 29th, 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: within 1%
- S&P 500: within 1%
- Nasdaq: off 7%
After a furious rally on Friday, the Dow & S&P 500 are nearly touching new record highs once again, while the Nasdaq and technology stocks were essentially flat over the past week. The rising interest rate environment continues to drive most of the activity on Wall Street and otherwise all of the debt spending out of Washington being pushed into the economy has to go somewhere and a lot of that is finding its way into stocks. That’s continuing to lead to a pricey and speculative market that’s banking on earnings continuing to soar and tax increases being pushed by the Biden administration to be relatively benign. Those are significant assumptions which could be areas of concern if they don’t both break as investors are currently expecting.
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: 40.47
- S&P 500 avg. P\E: 15.91
The downside risk is 61% based on earnings multiples right now from current levels. That's 48% more risk compared with this time last year. The difference is so stark in part because the market was in the throes of the short-lived market crash over pandemic fears a year ago. 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 61% 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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