How Low Can Stocks Go?

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. The Dow, S&P 500 & Nasdaq stand against their all-time high levels. The DOW: off 3.2%, S&P 500: off >1% and Nasdaq: off 1.2%.

Markets were mixed over the past week as markets continued to digest record earnings and good economic reports with a very mixed bag geopolitically (Turkey, Venezuela, etc.). 

Here's the 2018 year-to-date performance, the Dow is up 4.2%, the S&P 500 is up 6.9% and the Nasdaq is up 13.3%. As far as how low stocks could go? If only market fundamentals mattered here's what we would want to consider regarding the S&P 500 for example. S&P 500 P\E: 24.75 and S&P 500 avg. P\E: 15.72.        

The downside risk is 36% based on earning multiples right now from current levels. That's 3% less risk compared with this time last year on a fundamental basis alone and flat with two weeks ago. Earnings have continued to grow faster than stock prices over the past year.      

Now, as always, I don't expect that type of selloff to occur but it's 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. Your plan should balance your short-term needs with long-term objectives.

Photo By: Getty Images


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