How Low Can Stocks Go?

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 stocks go" goes as follows, the Dow, S&P 500 & Nasdaq stand against their all-time high levels:                           

  • DOW: 37% off record high
  • S&P 500: 34% off record high
  • Nasdaq: 30% off record high

Another week, more selling generally, though we are seeing more company-specific stories play out. For example, the Dow is off the most because of the Boeing debacle. The Nasdaq is actually flat over the past week because many of its largest companies are benefiting currently from the crisis. While partisanship in Washington is holding up the third phase of coronavirus aid, the biggest package aimed at providing checks to Americans and a backstop to companies big and small we're experiencing significant job loss and a lack of clarity. That’s the biggest issue of all. When and where does this story end? None of us know and that’s most problematic of all. It’s a lock that we’re in the early stages of a recession right now and we need to be braced for a brutal second quarter but then what? 

The Dow is down 35%, the S&P 500 down 31% and the Nasdaq is down 24% from a year ago.

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: 16.84
  • S&P 500 avg. P\E: 15.78

The downside risk is 6% based on earnings multiples right now from current levels. That's 25% less risk compared with this time last year. Based on trailing earnings the market is the best relative value we’ve since the Great Recession. But is it fool’s gold? It may be if life doesn’t resume for the foreseeable. Fundamentals would continue to deteriorate. At this point, we’re on pace for the fourth “near worst-case” event to play out with stocks since 1900. I’d prepare for the additional 6% drop at this point with a further reevaluation as earnings begin in April to see what deterioration looks like. It’s hard with no visibility. 

It's always important to ensure that you're positioned for negative adversity. If another 6% decline with the potential for more based on earnings season on the horizon 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.

Photo by Spencer Platt/Getty Images

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