From time to time, Wall Street provides a not-so-subtle reminder to the investment community that stocks can go down.
Since the highest levels of lockdown ever were achieved between mid-November 2021 and the first week of January 2022, young people are required to Dow Jones Industrial Average (^ DJI 0.59%)Widely Standard & Poor’s 500 (^ GSPC 0.48%)inventory-driven growth NASDAQ Composite (^ IXIC 0.01%) decreased by as much as 22%, 28%, and 38%, respectively. This means that all three major US indices have at least a short taste of a Alcohol market in 2022.
No matter how long you’ve been investing, bear markets can make you question your resolve to stay the course. In particular, the bear market of 2022 has many people wondering where the bottom might be. Although no indicator, metric, or statistic has accurately predicted the beginning or end of every bear market, one bear market indicator has an exceptionally strong track record of warning investors in advance.
This bear market metric indicates that more trouble awaits Wall Street
Looking back to 1870, the S&P 500 Shiller Price-to-Earnings Ratio (P/E) I predicted five bear markets. Shiller’s P/E, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), takes into account inflation-adjusted earnings from the previous 10 years.
While on the surface, the Shiller P/E is just another valuation tool, it is Accurately predict an upcoming bear market Anytime it crosses above 30 and maintains that level. This includes peaking above 30 in 1929 before the Great Depression, surpassing 44 during the dot-com bubble, passing 30 in the third quarter of 2018 and just before the coronavirus crash, and again (briefly) passing 40 during the first week of 2022. The short version is that anytime the S&P Shiller P/E ratio crosses the top 30 during a bull market, it is eventually followed by a drop in the S&P 500 of at least 20% (the key word, “eventually”).
But the Schiller P/E ratio can only be a useful prediction of where the bear market will go. With the exception of the financial crisis (2007-2009), a number of double-digit percentage recoveries in the S&P 500 over the past quarter-century have found their bottom when The S&P 500 Shiller hit P/E 22 (Give or take 1 or 2 points each way). This is not surprising given that professional investors and ordinary investors often become more critical of stock valuations during bear market declines.
I’m sorry to say, but this bear market indicator is, once again, sounding a warning that the broader market has yet to find its bottom – at least if history proves accurate. The recent bounce following lower-than-expected US inflation briefly pushed the S&P Shiller back above 29. Although anything is possible, no bear market has bottomed with Shiller’s P/E higher than it is now.
Given that a number of high-profile companies have begun to moderate their outlook, all signs point to a bumpy road for stocks through the end of 2022 and/or the start of 2023.
This “warning” is your chance to pounce
Although the S&P Shiller P/E ratio has a proven track record of being correct by time, it’s not perfect. But there is something with a proven track record: The Standard & Poor’s 500 Itself.
as such I have indicated previouslyTime is the greatest ally of investors. Trying to predict where the market will be a year from now is nothing more than a crapshoot. However, the longer you hold, the greater your chance of being right and making a fortune.
According to data collected by market analytics firm Crestmont Research, there hasn’t been a 20-year trading period since 1900 in which the S&P 500 has failed to generate a positive total return, including dividends paid. In other words, if you hypothetically bought and held the S&P 500 Tracking Index for 20 years, I made money 103 out of 103 times (Each year from 1919 through 2021 marks the end years of these 20-year periods.) Most of the time, investors made a lot of money, with over 40% of these final 103 years resulting in an average annual total return of at least 10.8%.
If you’re worried about “getting in too early,” consider this: He’s been there 39 low double-digit discrete percentage In the S&P 500 since the beginning of 1950. With the exception of the current bear market, all of the previous 38 crashes, corrections, and bear markets have been wiped out by a bull market. Again, it doesn’t really matter when You buy, as long as you give your investment(s) plenty of time to run and prove your thesis.
I must also state that this is not unique to the S&P 500. Every crash, correction, and bear market in the Dow Jones Industrial Average and the Nasdaq Composite was eventually dumped by bull markets.
In short, if the Schiller P/E ratio is giving off a warning, it’s probably a great time. Opportunistic investors in the long run to pounce.