How low can stocks go? Updated risks and values for 4-25-17:
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: 1.9% off all-time highs - higher vs. a week ago
- S&P 500: 1.1% off all-time high - higher vs. a week ago
- Nasdaq: All-time high - higher vs. a week ago
It would generally take a lot to divert attention from the most anticipated earnings season in years but the French election results did exactly that yesterday. A huge relief rally ensued as we ready for a runoff in two weeks that assures one outcome. The Socialists will be out of power in France. As for earnings season - it's still critically important as double digit earnings growth is anticipated and the first full week of earnings season was a mixed bag of results.
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: 25.10
- S&P 500 avg. P\E: 15.65
The downside risk is 38% based on earnings multiples right now from current levels. That's 3% less risk than a week ago despite higher stock prices. This demonstrates the power of improved earnings as early earnings results have outperformed stock prices over the past week. 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).