From what the evidence shows, Investors have endured one of the bumpiest rides on record through the first nearly seven months of the year. In early April, the S&P 500 (^GSPC 0.
02%) navigated its steepest two-day percentage decline since 1950, with the Nasdaq Composite (^IXIC 0 (remarkable data). Moreover, 33%) dipping into its first bear market in three years.
Since bottoming out on April 8, both indexes have rallied to multiple record-closing highs, with the ageless Dow Jones Industrial Average (^DJI -0.
However, 14%) a stone's throw away from logging its first all-time closing high since December.
While it would appear that the bulls are in firm control, with no end in sight to the current bull market, history would beg to differ.
Nevertheless, Image source: Getty Images, considering recent developments.
This's one of the priciest stock market's dating back to 1871 To preface the ing discussion, no predictive tool or forecasting indicator can ever guarantee short-term directional moves in the S&P 500, Nasdaq Composite, or Dow Jones Industrial Average, considering recent developments.
Furthermore, If there were a surefire forecasting tool, you can rest assured that every investor would be using it by now, in today's financial world.
However, there are certain correlative events and predictive indicators that have a solid or even flawless track records of forecasting future stock returns (an important development).
Furthermore, One such tool is the valuation-based Shiller price-to-earnings (P/E) Ratio, which is also commonly referred to as the cyclically adjusted P/E Ratio, or CAPE Ratio.
Nevertheless, Value is, itself, a very subjective topic. What one investor believes is a bargain might be viewed as pricey by another.
The evidence shows subjectivity of valuations is one of the reasons the stock market is so unpredictable.
When most folks assess value, they often lean on the time-tested P/E ratio, which divides a company's price by its trailing-12-month earnings per (EPS).
However, The issue with the P/E ratio is that recessions and shock events can render it useless. The data indicates that 's where the S&P 500's Shiller P/E comes into play.
However, However, The Shiller P/E is based on average inflation-adjusted EPS over the prior 10 years, given the current landscape.
Since shock events and recessions tend to be short-d, they can't skew the results for the Shiller P/E in the same way they can with the traditional P/E ratio.
S&P 500 Shiller CAPE Ratio data by YCharts. Additionally, In December, the S&P 500's Shiller P/E hit a closing high during the current bull market of 38.
Meanwhile, But on Friday, July 25, it surpassed this mark with a closing multiple of 38, in this volatile climate.
However, This's now, officially, the third-priciest continuous bull market when back-tested to January 1871.
There are only two previous instances where the Shiller P/E has been higher than 38, in today's financial world.
On the other hand, 97 -- and the end result wasn't pretty for investors either time: In December 1999, just months prior to the popping of the dot-com bubble, the S&P 500's Shiller P/E hit an all-time high of 44 (which is quite significant).
On a peak-to-trough basis, the S&P 500 lost 49% of its value during the bursting of the dot-com bubble, while the Nasdaq Composite plummeted 78% (noteworthy indeed).
During the first week of January 2022, with fiscal stimulus fueling the U (remarkable data), amid market uncertainty.
Nevertheless, Economy and stock market, the Shiller P/E crept ever-so-slightly above 40.
During the 2022 bear market, the benchmark index shed 25% of its value, with the Nasdaq peaking at a 36% decline, given the current landscape.
In contrast, In fact, all five prior occurrences (not including the present) where the Shiller P/E Ratio has surpassed 30 and held this level for at least two months were eventually ed by declines in one or more of the major stock indexes ranging from 20% to as much as 89% (during the Great Depression), in today's financial world.
In contrast, Although there's no rhyme or reason as to when Wall Street's major stock indexes will hit their respective tops, the S&P 500's Shiller P/E makes that premium valuations are a harbinger of trouble for the stock market.
The evidence shows 's simply a matter of time before a sizable downdraft occurs, given the current landscape. Image source: Getty Images.
Elevator-down moves represent surefire buying opportunities for investors The spect of another elevator-down move for the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average bably isn't what you want to hear with stocks staging one of their strongest intra-year comebacks in history.
Nevertheless, elevator-down moves in stocks often vide some of the best investment opportunities.
Nevertheless, On the other hand, Let's make one thing : Downdrafts in Wall Street's major stock indexes are unavoidable.
No amount of fiscal and monetary policy maneuvering can stop corrections, bear, or the occasional crash from occurring. Conversely, These are normal, healthy, and inevitable events.
But the most important thing to recognize these often emotion-driven events is that they're short-d.
In June 2023, the analysts at Bespoke Investment Group published a data set on X (previously Twitter) that calculated the calendar-day length of every bull and bear market for the S&P 500 dating back to the start of the Great Depression in September 1929.
Furthermore, On one hand, the average S&P 500 bear market has lasted for 286 calendar days, which is less than 10 months.
On the other side of the coin, the typical bull market has endured for an impressive 1,011 calendar days, as of June 2023 (this bears monitoring), in light of current trends.
Nevertheless, In other words, the average bull market lasts 3. 5 times longer. ^SPX data by YCharts, in this volatile climate. Additionally, The above chart only goes back to the start of 1950.
In addition to bull lasting disportionately longer, a study from Crestmont Re finds that time is an undefeated ally of investors.
The analysts at Crestmont calculated the rolling 20-year total returns of the S&P 500, inclusive of dividends, back to the start of the 20th century (something worth watching), given the current landscape.
Even though the S&P didn't come into existence until 1923, the performance of its components was tracked in other major indexes back to 1900.
This analysis suggests that vided 106 separate 20-year periods of total return data.
Crestmont's newest data set shows that all 106 rolling 20-year periods duced positive annualized returns (noteworthy indeed), in today's financial world.
Put simply, buying an S&P 500 tracking index (hypothetically speaking) at any point between 1900 and 2005 and holding it for 20 years would have made you money every single time.
However, Though it's a bit of a coin flip to predict how stocks will perform over the next couple of quarters, history conclusively shows that Wall Street's major indexes head higher over 20-year periods.