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. This week the Dow, S&P 500 and Nasdaq stand against their all-time high levels.
- DOW: 19% off record high
- S&P 500: 19% off record high
- Nasdaq: 19% off record high
Here we are coming off of the biggest one-day point decline in DOW history and a ten percent decline from a week ago today. This results in a market that’s within 1% of the bear market territory. The implosion of the oil market, which ironically will be positive for all non-oil related industries along with COVID-19 has proven to be the perfect storm. Something to remember from the onset of this sell-off is that stocks weren’t cheap. That’s added to the velocity of what’s happening. The question at this point is how quickly we see a turn in the virus. If it happens prior to widespread layoffs, we’ll rebound quickly and significantly. If it doesn’t and we see widespread layoffs, well. This would be justified. Here are the cords we’ve set over the past two weeks. Biggest down day in DOW history. Three times. Biggest one-day DOW increases. Two times. Quickest correction in stock market history. A lot is happening. And faster than we’ve ever experienced it. The President has announced the coming introduction of tax credits and stimulus measures aimed at helping individuals and businesses deal with the impact of the virus. This could be huge in helping keep the labor market intact until we turn the corner.
As for the markets, year to date, the Dow is down 16%, the S&P 500 down 15%, and the Nasdaq is down 11%. 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: 20.67
- S&P 500 avg. P\E: 15.78
The downside risk is 24% based on earnings multiples right now from current levels. That's 7% less risk compared with this time last year. Based on trailing earnings the market is the best relative value we’ve had in nearly a decade. That may not hold if earnings erode meaningfully for the rest of the year, but stocks have now generally priced in that likelihood.
I don't expect a 24% selloff but it's always important to ensure that you're positioned for negative adversity. If a short-term decline at those levels 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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