How low can stocks go? Updated risks and values for 4-18-17:
Bottom Line: In case you're new to this series, 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. 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. This week's edition of "how low can stocks go" goes as follows...re the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: 2.5% off all-time highs - flat vs. a week ago
- S&P 500: 2.1% off all-time high - down slightly vs. a week ago
- Nasdaq: 1.3% off of all-time high - down slightly vs. a week ago
The S&P 500 & Nasdaq sold off slightly over the past week amid questions regarding the next steps on foreign and domestic policy issues. That being said generally optimism still remains. We're nearing the 2nd quarter earnings season which will begin to heavily influence the market's direction. Currently analyst estimates call for profits to grow by 10.4% in the 2nd quarter. That would represent the biggest profit growth in six years.
As far as how low stocks could go...If only market fundamentals mattered here's what we'd want to consider with regard to the S&P 500 for example.
- S&P 500 P\E: 26.36
- S&P 500 avg. P\E: 15.65
The downside risk is 41% based on earnings multiples right now from current levels. That's flat with the downside risk of a week ago. Now, as always, I don't expect that type of selloff to occur but its always important to ensure that you are positioned for negative adversity. If a short-term decline at the aforementioned levels wouldn't affect your day-to-day life, you're likely well positioned to continue to take advantage of investment opportunities. If that size of selloff would rock your world over the short-term, that's when you should probably seek professional assistance in crafting your plan (that balances your short-term needs with long-term objectives).