This telltale bear market indicator is another warning


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dated: 2022-11-20 10:10:38 .

Every now and then, Wall Street reminds the investment community, not so subtly, that stocks can fall.

They are timeless since reaching all-time highs between mid-November 2021 and the first week of January 2022. Dow Jones Industrial Average (^DJI 0.59%), widespread S&P500 (^GSPC 0.48%) and stock growth Nasdaq Composite (^IXIC 0.01%) are in decline as much as 22%, 28% and 38%, respectively. This means that all three major US indices have at least called for a bear market in 2022.

Image source: Getty Images.

No matter how long you’ve been investing, bear markets can make you question your determination to stay the course. The 2022 bear market in particular has many people wondering where the bottom might be. While no single indicator, metric, or statistic has accurately predicted the beginning or end of every bear market, one telltale bear market indicator has an exceptionally good record of warning investors.

This bear market metric suggests that Wall Street is in for more trouble

Going back to 1870, the S&P 500 Shiller price-to-earnings (P/E) multiple predicted the arrival of five bear markets. The Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, takes into account inflation-adjusted earnings over the last 10 years.

While the Shiller P/E is, on the surface, just another valuation tool, it accurately predicts an upcoming bear market whenever it breaks above 30 and holds that level. These include a peak above 30 in 1929 before the Great Depression, a peak of 44 during the dot-com bubble, a break of 30 in the third quarter of 2018 and just before the fall of the coronavirus, and a second (brief) break of 40 during the first week of the Great Depression in 2022. Short version is that every time the S&P Shiller P/E crosses 30 during a bull market, the S&P 500 ends up falling at least 20% (key word “eventually”).

S&P 500 Shiller CAPE ratio data from YCharts.

But the Shiller P/E can also be useful in predicting where a bear market will bottom. With the exception of the financial crisis (2007-2009), the streak of double-digit percentage moves in the S&P 500 over the past quarter-century bottomed out when the S&P 500 Shiller P/E reached 22 (give or take). one or two points in each direction). That’s not too surprising given that professional and everyday investors are often more critical of stock valuations during market downturns.

I’m sorry to say it, but this telltale bear market indicator is yet another warning that the broader market has yet to find its bottom—at least if history proves correct. The recent recovery from lower-than-expected U.S. inflation pushed the S&P Shiller briefly back above 29. While anything is possible, no bear market has bottomed out with the Shiller P/E as it is now.

With a number of high-profile companies starting to weaken their outlook, all signs seem to point to a bumpy road for stocks through late 2022 and/or early 2023.

Image source: Getty Images.

This “warning” is your opportunity to attack

While the S&P Shiller price-to-earnings multiple has proven to be accurate, it is not perfect. But there is something that has a perfect track record: the S&P 500 itself.

As I mentioned before, time is an investor’s best ally. Trying to predict where the market will be in a year is nothing more than foolish. However, the longer you hold, the better your chances of being right and building wealth.

According to market analysis firm Crestmont Research, there hasn’t been a 20-year period since 1900 in which the S&P 500 hasn’t posted a positive total return, including dividends paid. In other words, hypothetically, if you bought the S&P 500 tracking index and held it for 20 years, you made money 103 times out of 103 (with each year from 1919 to 2021 representing the closing years for these 20-year periods). Most of the time, investors made a fair amount of money, with more than 40% of those 103 closing years resulting in an average annual total return of at least 10.8%.

If you’re worried about “getting in too early,” consider this: Since the early 1950s, the S&P 500 has had 39 separate double-digit percentage declines. Corrections and bear markets are eventually eliminated by a bull market. Once again, it doesn’t really matter if You will buy as long as you give your investment(s) enough time to develop your case and prove it right.

I should also say that this is not unique to the S&P 500. Every decline, correction, and bear market in the Dow Jones Industrial Average and Nasdaq Composite eventually swept away bull markets as well.

In short, when Shiller’s P/E generates a warning, it’s often a good time for opportunistic long-term investors to jump in.


This telltale bear market indicator is another warning

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