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How Low Can Stocks Go? Updated Risks & Values – September 7th, 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: within 1% of a record high
- Nasdaq: within 1% of a record high
Stocks continued to generally drift higher last week on back of a smattering of great earnings reports from retailers which helped ease concerns that consumer spending, which is about 70% of the US economy, was starting to dry up and growing optimism that the summer surge in COVID-19 cases will end at about the time summer does. With over 2 million more job openings than those who’re unemployed, there’s also optimism that the ending of the federal unemployment benefits this weekend will help spur additional hiring activity providing another catalyst for the economy in the homestretch of the year. States like Florida which ended the federal unemployment benefits in June saw a 6% increase in job search and hiring activity over prior 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: 35.38
- S&P 500 avg. P\E: 15.95
The downside risk is 55% based on earnings multiples right now from current levels. That’s flat with 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.