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How Low Can Stocks Go? Updated Risks & Values – June 14th, 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 2%
- S&P 500: record high
- Nasdaq: within 1%
Stocks generally drifted higher again last week despite continuing inflation concerns after the May Consumer Price Index Report showed the largest increase in consumer prices, 5%, since August of 2008. Despite the spike, the Federal Reserve seems content to continue not raising interest rates for now and that’s been enough for the markets to shake off an indicator that’d otherwise being troubling. Average hourly incomes have risen by 6% over the past year which helps mitigate the 5% rise in prices. Additionally, there’s optimism that states like Florida, which are ending extended unemployment benefits will see an increase in employment. It provides hope that there could still be another leg up in the economy as these individuals go back to work and companies which have been shorthanded are able to meet their needs.
Also, earnings estimates for the second quarter have continued to go higher, with the average company expected to earn 5.8% more than what analysts thought coming out of the first quarter. That’s key given the pricey state of stocks on a trailing 12-month earnings basis.
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: 45.12
- S&P 500 avg. P\E: 15.94
The downside risk is 65% based on earnings multiples right now from current levels. That's 30% 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 65% 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.