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How Low Can Stocks Go? Updated Risks & Values – June 21st, 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.
Here's where the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: 5% off
- S&P 500: 2% off
- Nasdaq: 1% off
Stocks were lower across the board last week in what proved to be the worst week for stocks since last October. That said the losses weren’t equitable and it’s reflected in the differences between the major indexes with the DOW 30 taking far greater losses than the tech heavy Nasdaq. The story was and is about inflation. The indication by the Federal Reserve was that they still weren’t overly worried about it and the most important reaction to the fed in the financial markets happened in currency. The US Dollar Index, which values the US Dollar against a basket of leading world currencies rallied hard to end the week. The value of the US dollar is still 5% less than a year ago today, meaning you have to have five percent more money to retain the same buying power as a year ago, however that’s vastly improved from the 10% haircut of the dollar of just about a month ago. The dollar’s rise has sent commodity prices falling bringing the biggest declines in stocks that benefit from higher inflation like commodity companies and banks, while giving rise to growth companies once again. We’ll see what this week brings...
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: 44.26
- S&P 500 avg. P\E: 15.94
The downside risk is 64% based on earnings multiples right now from current levels. That's 27% 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.