How Low Can Stocks Go? Updated Risks & Values – September 13th

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How Low Can Stocks Go? Updated Risks & Values – September 13th, 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: 3% off recent highs
  • S&P 500: 2% off recent highs
  • Nasdaq: 2% off recent highs

September is historically the worst month for stock market performance. With an average annual loss of nearly 1%, it’s been the most likely time for corrections (a decline of 10% or more) or even bear markets (a decline of 20% or more) to occur. With markets having rallied hard this year and valuations rather pricey from a historical perspective, many investors have started taken some money to the sidelines. Especially given the concerns regarding COVID variants, unknowns regarding vaccine duration and efficacy against all variants and a slowing US economy. There are reasons to pull money off the table if you’re looking for them. Increasingly there’s thought that a correction is in the offing and last week was the beginning of it. Time will tell, but given the history I just explained I wouldn’t be the least bit surprised if it did. 

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: 34.78
  • S&P 500 avg. P\E: 15.95

The downside risk is 54% based on earnings multiples right now from current levels. That’s 1% less risk than a week ago and it’s 11% lower than at the recent highs from where valuations were entering the prior 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 54% 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.

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