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's edition of "how low can stock go" goes as follows, re the Dow, S&P 500 & Nasdaq stand against their all-time high levels:
- DOW: 20% off record high
- S&P 500: 17% off record high
- Nasdaq: 13% off record high
Stocks were up about 2% across the board over the past week despite yesterday’s selloff and only the DOW remains in bear market territory. The market is in a weird space with a lot of investors looking for a place to invest and guessing at what the new normal will look like and when we will get there. The market’s pricing seems to suggest a generally optimistic view all of the way around. Another way of evaluating stocks is through a potential disconnect with the real economy. With the Federal Reserve backstopping the financial markets to the tune of trillions of dollars, it’s hard for a lot of the money not to find its way into equities.
This is a different version of a similar thing to what happened during the Great Recession a decade ago which help stocks recover and perform better than the US economy as a whole. With earnings season still in the early going, we're just starting to get an idea of what the scorched corporate landscape looks like. However, with almost all companies withdrawing guidance for the rest of the year, it's hard to infer much more than what’s been reported which reflects what’s already happened. With negative oil prices achieved for the first time ever yesterday in the United States, just about anything’s possible right now. I remain skeptical of the recent rally off of the lows from mid-March. Until we hear more stories of people going back to work than being laid off from work, it's not certain where the bottom in the real economy will be.
Year to date:
- The Dow is down 17%, the S&P 500 down 13% & the Nasdaq is down 5%
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: 20.24
- S&P 500 avg. P\E: 15.78
The downside risk is 22% based on earnings multiples right now from current levels. That's 10% less risk compared with this time last year, however, fundamentals on trailing earnings will deteriorate. The market is priced as though earnings will only drop by about 10% this year. That might be a bit too optimistic. It's always important to ensure that you're positioned for negative adversity. If another 22% 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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