How low can stocks go? Updated risks and values – April 19th, 2021

How low can stocks go? Updated risks and values – April 19th, 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: Record high
  • Nasdaq: within1%

Last week brought a fourth consecutive week of strong gains for stocks as earnings season got under way – providing additional pop to the market. A strong earnings recovery was expected, especially as companies are reporting earnings that now include year over year comparisons which include the initial weeks of the pandemic impact...but what we’re seeing is nothing short of spectacular. Through Friday, 9% of companies had reported earnings. 81% have exceeded expectations and the average beat is by greater than 30%. If this holds, we’ll have the most impressive earnings season reported in modern stock market history. That’s why an already pricey market has continued to rally. What’s being reported is that impressive. 

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: 42.61
  • S&P 500 avg. P\E: 15.92

The downside risk is 63% based on earnings multiples right now from current levels. That's 40% more risk compared with this time last year. The difference is so stark in part because the market was in the throes of recovery from the short-lived market crash over pandemic fears a year ago. The market remains historically expensive right now. Stocks are clearly priced for earnings to continue to rebound. If the economy does continue to recover as expected, stock prices can be justified. If something were to come out of left field – hold your butt...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 63% 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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