Jim Niedelman:
It’s now time for 4 Your Money. We’re joined by David Nelson, CEO of NelsonCorp Wealth Management. Great to see you again, David.
David Nelson:
Thank you, Jim.
Jim Niedelman:
Last week, we talked about some of the conditions you’re watching to determine whether stocks are in that bottoming out process. Given the decline we’ve seen so far this year, do stocks look cheap to you now? How does that play into your analysis of where we are in this cycle of things?
David Nelson:
Well, there’s no question that stock prices have come down and still down. I mean, we’ve had a little bit of a bump here as far as a rally over the last week or so. Time will tell whether that continues. But at the end of the day, prices have come down. Valuations, we’re not as sure of at this point that they’ve come down. It’s all going to be predicated as far as on earnings as far as going forward. But clearly, as far as the overall stock prices are concerned, they’re lower.
David Nelson:
Now, I brought along this slide. The first slide is going to illustrate here, give you just a nice visual. I’ll kind of move through this. The middle part in red is what we’re looking at, and we’ve got identified there with an arrow closer to fair value.
David Nelson:
Stocks were significantly overpriced coming into this draw down that we’ve experienced lately. They’ve now gotten back closer to fair value. Time will tell as far as whether they get below fair value. History says they will. We’ll have to wait and see. Most people are hoping that the worst is behind us, but time will tell as far as whether the worst is behind us or not.
Jim Niedelman:
People certainly want to be optimistic about things. Is there anything that could change this trend of lower valuations?
David Nelson:
So as that slide two. Slide two is basically going to show people a visual showing earnings as far as what’s taken place in red. Then in blue, it’s going to be the estimates. If we look at the estimates, we see towards the right there, the far right, is that estimates have come down pretty significantly as far as from where they were say a month or so ago. That’s good indication as far as that people are being realistic.
David Nelson:
The problem is if earnings come down as much as stock prices proportionally have come down, the bottom line is we found ourself back in the same spot as we were as far as from a valuation perspective. That’s not what people want to hear, but that’s the reality. If earnings drop like we think they’re going to be dropping, they’ve taken a big hit as far as we’re shutting down this economy, chances are they’re going to come down proportionally as much as stocks have, leaving us in a similar position we were in before where valuations aren’t cheap. They’re either fair value or maybe even a little overvalued as far as that point in time.
Jim Niedelman:
You always give us something to think about. David Nelson of NelsonCorp Wealth Management, great to see you. Thanks for your advice. If you missed any of this-
David Nelson:
Thank you, Jim.
Jim Niedelman:
… discussion, we have that for you on OurQuadCities.com.