How Low Can Stocks Go? Updated Risks & Values – August 23rd, 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: 1.4% from a record high
- S&P 500: >1% from a record high
- Nasdaq: 1.2% from a record high
Stocks wobbled last week as we began to transition from a record setting earnings season into the land of what ifs. The Federal Reserve tapering bond purchases, disappointing retail sales, slower projected growth rates and of course whatever will be with COVID-19 variants. These questions are at the forefront of what was a weaker week for stock prices and could open the door to additional selling in coming weeks. Uncertainty is never the stock market’s friend and with record earnings and record high stock prices a correction wouldn’t be unexpected.
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: 34.65
- 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, in fact it’s been flat for a full month now. It is 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. 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.