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How Low Can Stocks Go? Updated Risks & Values – November 29th, 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. My first rule of money is to never let your money and emotions cross paths.
Here's how the Dow, S&P 500 & Nasdaq have performed year-to-date:
- DOW: +14% YTD
- S&P 500: +22% YTD
- Nasdaq: +20% YTD
In a word...omicron happened Friday. Historically holiday shortened trading days have generally been positive for stocks. The WHO’s designation of its latest “variant of concern”, saw to it that, that wouldn’t be the case. After a wipeout day for stocks and cryptos, dropping stocks to their lowest levels in over a month, we’re entering a new week with more questions than answers about what happens from here. Ordinarily stock analysts would be talking about the prospects of a “Santa Claus rally” into year end. Instead, attention is centered on how many countries the new COVID variant has already entered, and what the impact will be heading into the traditional peak of flu season.
As for cryptos over the past week, like stocks, they were crushed on back of the omicron news with majors like Bitcoin now being in bear market territory, or a decline of greater than 20% from all-time highs. Entering the week at about $54,000, Bitcoin is at its lowest level since the first week of October and other cryptos have likewise joined it with similar losses.
Today marks the start of travel restrictions into the United States from 8 countries. From a public policy standpoint what was now old during this pandemic, is once again new. Aside from health concerns, you have to wonder how many lockdownish measures will begin to hit around the country – let alone the rest of the world – and what the overall impact will be to the economy as a result.
Here’s where the market stands based on fundamentals using the S&P 500 as the example.
- S&P 500 P\E: 28.94
- S&P 500 avg. P\E: 15.95
The downside risk is 45% based on earnings multiples right now from current levels. That’s 10% less risk than the highs reached earlier this year due to improved earnings and the recent selloff. It's always important to ensure that you're positioned for negative adversity. I don’t expect anywhere near a 45% decline, however in theory it’s possible if the near worst case outcomes occurred. If a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If that is a problem for you, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.