Investors seeking to grow their wealth have long considered various asset classes, including Treasury bonds, certificates of deposit, real estate, and commodities. However, stocks have consistently offered the highest annualized returns over the last century.
Despite this, volatility is a natural aspect of investing in the stock market. Recent market fluctuations have raised questions about the future direction of equities. Historically, specific metrics and events have correlated strongly with directional moves in major indexes.
A rare indicator that has surfaced only three times since January 1871 has foreshadowed significant downside for stocks. This indicator is based on the S&P 500’s Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted P/E ratio or CAPE ratio.
The current Shiller P/E multiple of 36.52 is more than double its historical average reading and slightly below its peak reading in December 2024. This rare occurrence has only happened three times since January 1871: in December 1999, immediately prior to the bursting of the dot-com bubble, and in recent months.
Historical data shows that when the Shiller P/E reaches above 30, it has consistently foreshadowed significant downside for equities. In fact, including these instances, there have been six total occurrences where the Shiller P/E surpassed 30 and maintained this level for at least two months, resulting in a loss of between 20% and 89% of their value.
Despite this rare indicator, history suggests that downturns are short-lived and eventually give way to new all-time highs. The numbers game favors long-term-minded optimists, and correcting our perspective can help maintain a healthy and growing stock investment portfolio.
In June 2023, analysts at Bespoke Investment Group confirmed the start of a new bull market after analyzing calendar day lengths of S&P 500 bull and bear markets since the Great Depression. Although recent market fluctuations may seem dire, history shows that corrections are normal and inevitable aspects of investing.
A new bull market has already seen significant recovery, with the S&P 500 up 20% from its 10/12/22 closing low. The average length of a bear market is approximately 286 calendar days, and the longest bear market on record lasted only 630 days in the mid-1970s.
Maintaining optimism and perspective can help investors navigate the ups and downs of the stock market. By recognizing that downturns are short-lived and eventually followed by new all-time highs, long-term-minded optimists can maintain a healthy and growing stock investment portfolio.
Source: https://www.fool.com/investing/2025/06/08/stock-market-3-times-154-years-history-what-next