How low can stocks go? Updated risks and values for 5-30-17:

How low can stocks go? Updated risks and values for 5-30-17:    

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% off all-time high - higher vs. a week ago                
  •  S&P 500: > 1% off all-time high - higher vs. a week ago             
  •  Nasdaq: >1% off all-time high - higher vs. a week ago    

Earnings season has been nothing short of spectacular. Growth of 10.4% - the best in six years - was expected coming into earnings season. Companies reporting earnings have delivered nearly 13.9% year over year growth smashing estimates and helping support higher stock prices. Estimates for the rest of the year have also been revised higher. The improved outlook for healthcare and tax reform - along with the budget deal are also welcomed news to the market.   

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: 25.55                                 
  • S&P 500 avg. P\E: 15.65                    

The downside risk is 39% based on earnings multiples right now from current levels. That's about the same risk as a week ago. This earnings season demonstrated the power of improved earnings. With the super-strong growth year over year - stock prices are meaningfully higher than a couple of months ago, yet risk has actually declined because fundamentals have improved faster than prices have risen. As earnings season wraps up attention will quickly focus back to Washington to see if we get any follow-through on a pro-growth agenda. That will likely dictate how prices drift until the start of next earnings season.

Now, as always, I don't expect that type of selloff to occur (39%) but its always important to ensure that you're 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).

 
Brian Mudd

Brian Mudd

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