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How Low Can Stocks Go? Updated Risks & Values – August 30th, 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% of a record high
- S&P 500: Record high
- Nasdaq: Record high
The rally returned to Wall Street last week on back of record setting earnings season backed up with confidence that the Federal Reserve will be able to successfully thread the needle as they back off of accommodative policies that have helped flood the financial markets with money. Stocks were generally pushed to record highs on Friday driven by Fed Chair Powell’s comments suggesting inflation will subside by next year – even if there’s increasing skepticism that’s not the case. Especially if Democrats are able to push additional spending bills through Washington.
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: 35.17
- S&P 500 avg. P\E: 15.94
The downside risk is 55% based on earnings multiples right now from current levels. That’s about 1% higher than a week ago, though it’s 10% lower than at the recent highs from where valuations were entering 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 55% 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.