How low can stocks go? Updated risks and values for August 1st:

How low can stocks go? Updated risks and values for August 1st:  

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 the Dow, S&P 500 & Nasdaq stand against their all-time high levels:                                  

  •  DOW: Record high     
  •  S&P 500: within 1% of highs - slightly lower than a week ago         
  •  Nasdaq: -1.7% off of all-time highs - lower vs. a week ago    

Earnings have been awesome so far in 2017. As we're early in the 2nd round of 2017 earnings, expectations are continuing to rise. Coming into the reporting season estimates for year over year growth were at 6.2%. So far, based on the companies that have already reported, growth has been 9.1%! If this holds we'll have record earnings for the S&P 500 (over the past year). So we're off to a great start. There are still other question marks. Will healthcare reform get done (no one is holding their breath)? Ditto taxes? But for the now the earnings have been good enough to take the pressure off of political catalysts.

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: 24.63                                 
  • S&P 500 avg. P\E: 15.66                    

The downside risk is 36% based on earnings multiples right now from current levels. That's 4% less risk than a week ago without a selloff. 2017 is proving the power of improved earnings. With the super-strong growth year over year, stock prices are meaningfully higher as compared to the start of 2017, yet risk has actually declined because fundamentals have improved faster than prices have risen. 

Now, as always, I don't expect that type of selloff to occur (36%) 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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