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.
October has historically been a better month for stocks, it’s also given birth to three of the four biggest bear market declines in US stock market history (1929, 1987, 2008). Stocks are historically pricey, the market’s been supported by the Federal Reserve keeping the sugar rush going by continuing to flood the financial markets with easy money policy – which contributes to inflation, which is of a course a concern for you and me. There are continuing supply chain concerns throughout the economy, ongoing labor shortages which are only being complicated by select employers firing unvaccinated employees. Oh right, and whatever the heck is happening in Congress, if something happens could include massive tax increases for individuals and businesses alike.
There’s one big reason you can hang onto optimism if you’d like. Earnings. In the end, it all comes back to earnings. Analysts have actually raised estimates over the past couple of months by about another 3%. That helps considerably. As we enter this week, based on fundamentals using the S&P 500 as an example, this is where the market stands. S&P 500 P\E: 33.99 and S&P 500 avg. P\E: 15.95.
The downside risk is 53% based on earnings multiples right now from current levels. That’s 1% less risk than a week ago and it’s 12% lower than at the recent highs due to improved earnings. That’s the power of improved earnings, helping to justify stock prices which also mitigates risk. It's always important to ensure that you're positioned for negative adversity. I don’t expect anywhere near a 53% 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.
Photo: Getty Images