Updated Risks & Values; How Low Can Stocks Go

posted by Claudia Mendoza - 

How low can stocks go? Updated risks and values, a special “correction edition”.

My first rule of money is to never let your money and emotions cross paths. I do this series weekly, on Tuesdays, to provide pragmatic perspective on the stock market. The last thing I want you doing is making emotional mistakes with money. Statistically speaking, over 90% of financial decisions based on emotional responses end in worse results than doing nothing. That’s especially true when investing. With the 1400 selloff within two days and many of the financial fears mongers eager to scare you into handing them your money, I felt it appropriate to update where we stand as of today.  

First, here’s where the Dow, S&P 500 and Nasdaq stand against their all-time high levels:   

  • DOW: off 7%                
  • S&P 500: off 7.2%       
  • Nasdaq: off 9.9%         

Notably, none of the big three are in correction territory yet. A correction kicks in with a decline of 10% or more. I’m going to provide the near-worst case downside risk and then provide you what I think will happen here.              

As far as how low stocks could go? If only market fundamentals mattered here's what we'd want to consider regarding the S&P 500 for example.                

  • S&P 500 P\E: 22.29       
  • S&P 500 avg. P\E: 15.72             

The downside risk is 29% based on earnings multiples right now from current levels. So, what does that mean? It means that if your day-to-day life would negatively be changed, if that type of a selloff happened from current levels, you should probably be discussing a plan with a professional who can assist. If it wouldn’t, we’re coming into a likely buying opportunity in the near future. The me to you is this. I think it’s likely that we correct before the month of October is over. Meaning my expectation is for the additional downside of 3% or so from here generally before the markets settle out. But please, for your own sake, whatever decisions you do make, don't let them be emotional. Pragmatism and planning is the way to go.

Photo By: Getty Images North America

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