How Low Can Stocks Go? Updated Risks & Values – August 16th, 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: record high
- S&P 500: record high
- Nasdaq: within 1% of a record high
Three numbers continue to climb. COVID-19 cases, inflation and stock prices. Two of those three aren’t good news for the economy however earnings have simply been too good to ignore. The near completed earnings season has been record setting. Earnings have exceeded expectations by the widest margin in recorded stock market history. Through Friday, 91% of companies had reported earnings for the second quarter. The results are impressive to say the least.
- 87% of companies have exceeded earnings expectations
That shattered the previous record of 79% and the average increase in earnings has been nearly 25% year over year. Importantly for investors, it helped to justify stock prices at record high levels. 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: 34.85
- S&P 500 avg. P\E: 15.94
The downside risk is 54% based on earnings multiples right now from current levels. That's flat compared to a week ago, but 11% lower than at the start of earnings season. That’s the power of improved earnings helping to justify stock prices which also mitigates risk. If inflation and the virus don’t derail the recovery there’s a lot to feel good about from an investor’s perspective. That being said, as we move away from earnings season and into headwinds with these issues, the path ahead could be a rocky one. The market’s due for a correction simply based on historical factors after a run like the one we’ve had in recent months.
It's always important to ensure that you're positioned for negative adversity. If a 54% 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.