How Low Can Stocks Go? Updated Risks And Values – May 17th, 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: 2% off
- S&P 500: 2% off
- Nasdaq: 6% off
Earnings were awesome but inflation is real. That remains the story as we enter a new week following one in which stocks were mostly lower though, it was a wild ride during the week to get there. Higher inflation is almost always better news for traditional value stocks – companies which retain pricing power and can improve margins. It’s typically bad news for technology stocks and related companies. With inflation having hit 4.2% according to last week’s CPI, and even 3% without volatile commodities – inflation isn’t just real, It’s the highest it’s been in 13 years. Should that hold, and there’s every reason to expect it to currently, that'll change many dynamics Americans have grown accustomed to. None the least of which are low interest rates. Everyone who has outstanding variable rate debt or who intends to take on a loan should be mindful of this. Historical interest rates are about double where they are today.
Through Friday, 91% of companies had reported earnings with a remarkable 86% that have exceeded expectations and the average beat is by greater than 23%. We’re pacing the second most impressive earnings season relative to expectations in modern stock market history.
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: 44.34
- S&P 500 avg. P\E: 15.94
The downside risk is 64% based on earnings multiples right now from current levels. That's 37% more risk compared with this time last year. The market remains historically expensive right now. Stocks are 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 – there’s clearly 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 64% 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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