Stock market reaching the second most expensive level in 154 years, historical data suggests a cautionary significant drop might ensue
The S&P 500 has reached a new historical high of 6,500, marking the confirmation of a new bull market. This comes after a significant two-day percentage decline five months ago, which was attributed to President Donald Trump's tariff and trade policy. However, since President Trump announced a 90-day pause on higher "reciprocal tariffs" on April 9, the S&P 500, along with the Nasdaq Composite and the Dow Jones Industrial Average, have been achieving multiple record-closing highs.
The current bull market has been quite resilient, with the S&P 500 now up 20% from its closing low on 12th October 2022. This durability is in stark contrast to the dot-com bubble, which started just months after December 1999. The bubble led to the S&P 500 and Nasdaq Composite losing 49% and 78%, respectively, on a peak-to-trough basis.
Interestingly, the S&P 500's Shiller P/E ratio has surpassed 40 in the first week of January 2022, a level that has only been seen twice in the past 154 years, the other instance being in December 1999. Any instance where the S&P 500's Shiller P/E ratio has surpassed and sustained 30 for a period of at least two months has been a harbinger of significant downside.
Despite this, the S&P 500's Shiller CAPE Ratio closed at 39.18 in the current bull market, marking its highest value during this period. This ratio is a cyclically adjusted price-to-earnings ratio, intended to better capture changes in the earnings of the stock market over the business cycle.
It's worth noting that the S&P 500, Dow Jones, and/or Nasdaq Composite lost between 20% and 89% of their value following the five previous occurrences where the Shiller P/E topped 30. However, the S&P 500 has never been down over any rolling 20-year period, including dividends, a strong endorsement for the U.S. economy and stocks in the decades to come.
A study by Bespoke Investment Group found that over a nearly 94-year stretch, the typical bull market was sustained for 1,011 calendar days, or two years and nine months. This suggests that the current bull market, while impressive, is still far from breaking any records for length.
In June 2023, analysts at Bespoke Investment Group published a data set on X (formerly Twitter) that examined the calendar length of every bull and bear market in the S&P 500 dating back to the start of the Great Depression in 1929. The report found that the prior bear market, which resulted in a quarter of the S&P 500βs value being wiped out and more than a third of the Nasdaqβs value, saw the index fall 25.4% over 282 days.
The average length of a bear market decline of 20% or more is approximately 9.5 months, while the typical bull market is sustained for about two years and nine months. This indicates that while bear markets are shorter, they can still cause significant losses for investors.
As the S&P 500 continues to reach new highs, investors are left to wonder how long this bull market will last and whether it will follow the trend of previous bull markets or break new ground. Only time will tell.
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