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How Low Can Stocks Go? Updated Risks & Values – July 6th, 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: within 1%
- S&P 500: record high
- Nasdaq: record high
Stocks rallied across the board last week allowing the Nasdaq & S&P 500 to reach new highs once again. Optimism regarding the rate of inflation being reigned in as the US Dollar has come off its lows, along with strong follow-through in the June employment report set the stage for recovery optimism to continue. We’re also seeing more money steering back into stocks as the cryptocurrency market struggles.
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: 46.24
- S&P 500 avg. P\E: 15.98
The downside risk is 65% based on earnings multiples right now from current levels. That's 28% 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.