The S&P 500's Shiller P/E ratio closed at nearly 40.5 on July 27, a level the U.S. stock market has reached only six times since 1871. The previous five occurrences each preceded a crash, though the same historical record shows bull markets outlasting the bears that follow them.
A closely watched valuation gauge just flagged a warning seen only five times before — and every prior instance ended in a crash. The S&P 500's Shiller P/E ratio closed at nearly 40.5 on July 27, pushing the metric into territory it has occupied just six times since January 1871.
A mark reached six times since 1871
The Shiller P/E, also called the Cyclically Adjusted P/E Ratio, uses ten years of trailing earnings so recessions do not distort it the way they can a standard P/E ratio. Since 1871, the ratio has averaged 17.4. The current bull market's Shiller P/E already peaked at 42.84 in early June, the second-highest multiple in the index's 155-year history.
The warning comes even as major benchmarks keep climbing. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite have all climbed to record highs since early June.
Five previous instances, five crashes
The Shiller P/E has broken above 30 during a sustained bull market six times since January 1871, the current run included. Every earlier instance ushered in a downturn:
- 1929: The ratio first broke above 30 in August and September 1929, just before the Great Depression. The Dow Jones Industrial Average eventually lost 89% of its value from peak to trough.
- 1997–2001: The ratio hit an all-time high of 44.19 in December 1999, three months before the dot-com bubble burst. The S&P 500 and Nasdaq Composite eventually lost 49% and 78% of their value, respectively.
- 2017–2018: The ratio peaked above 33 in early 2018. The S&P 500 — Wall Street's benchmark index — shed 20% of its value in the fourth quarter of that year.
- 2019–2020: The ratio crossed 30 again heading into the pandemic. The S&P 500 then lost 34% in 33 calendar days once COVID-19 hit.
- 2020–2022: The ratio briefly topped 40 in early January 2022. That marked the start of a nine-month downturn that cut the Nasdaq Composite by one-third.
Bull markets still outlast the bears
History also offers a counterweight for long-term investors. Data from Bespoke Investment Group show the average S&P 500 bear market has lasted 286 calendar days since the Great Depression began in September 1929. No 20% decline has taken longer than 630 calendar days to reach its trough.
The average bull market, by contrast, has run 1,023 calendar days — roughly 3.6 times longer than the typical bear market. 14 of the 27 S&P 500 bull markets since 1929 have lasted longer than the longest bear market on record.
Source: The Motley Fool
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