A Stock Market Crash May Be Close: 4 Must-Know Metrics That'll Make You a Smarter Investor
If you take these numbers to heart, you'll look like a genius when the next big move lower strikes.
It's the three words investors most dread: stock market crash.
With the memory of the benchmark S&P 500's (SNPINDEX:^GSPC) 34% nosedive in just 33 calendar days last year still fresh in many investors' minds, the last thing they'd probably like to think about right now is the prospect of another crash or steep correction on the horizon. Unfortunately, that's a very real possibility currently on the table.
The case for a stock market crash is growing
Arguably the biggest concern for equities at the moment is valuation. Despite ideal conditions for growth stocks -- historically low lending rates, dovish monetary policy, and free-flowing stimulus spending from Washington -- valuations eventually always matter. As of this past Monday, April 12, the S&P 500's Shiller price-to-earnings (P/E) ratio topped 37, which is well over double its historic annual average of 16.81. The Shiller P/E ratio (also known as the cyclical-adjusted P/E ratio, or CAPE) is based on average inflation-adjusted earnings from the previous 10 years.
Why's this important? There have only been five instances over the past 150 years where the S&P 500's Shiller P/E ratio surpassed and held above the 30 level during a sustained bull market. In the previous four instances, not counting the current bull market event, the S&P 500 eventually retraced by a minimum of 20%.
There's additional historical precedence for moves lower following a bear-market bottom. Since 1960, the investment world has navigated its way through nine bear market declines, including the coronavirus crash. In each of the previous eight bear markets, there was an aggregate of 13 pullbacks ranging between 10% and 19.9% within three years of finding a bottom. To simplify this data, it means that every bounce-back from a bear-market bottom over the last 61 years has involved at least one or two knee-jerk moves lower.
