The Stock Market Has Crossed This Threshold 6 Times Since 1871 -- and History Couldn't Be Clearer What Comes Next

As investors, we're constantly seeking insights to guide our decisions. Some chase excitement, betting on options and risky stocks. But I'm here to tell you that there's a different path to success – one that favors stability, predictability, and consistent growth. Let's explore a historical threshold that, when crossed, has consistently pointed to significant market downturns.

The S&P 500's Shiller P/E ratio, a valuation metric based on average inflation-adjusted EPS over the previous 10 years, has crossed above 30 six times since 1871. Each time, it was followed by significant declines in the Dow Jones, S&P 500, and Nasdaq Composite. The most notable instances include the Great Depression (1929), the dot-com bubble (2000), and the 2022 bear market (2022). The S&P 500 has lost between 20% to 89% of its value following these threshold crossings.



This historical pattern suggests that investors should expect a sizable correction in the near future. However, it's important to note that the Shiller P/E doesn't provide a timeline for these declines. For instance, the market remained pricey for more than four years surrounding the dot-com bubble.

But what about other valuation metrics? The traditional P/E ratio, which doesn't account for growth, can be misleading during shock events. The Shiller P/E, using average inflation-adjusted EPS over 10 years, smooths these fluctuations. Similarly, the Buffett Indicator, market cap-to-GDP ratio, recently surpassed 200% for the first time, also signaling overvaluation. Both metrics suggest that the market may be due for a correction, aligning with the historical pattern indicated by the Shiller P/E threshold.

As investors, we must be aware of these historical patterns and use them to inform our decisions. While the market may continue to rise in the short term, history tells us that a correction is likely when the S&P 500's Shiller P/E ratio crosses above 30. By understanding this threshold and its implications, we can better prepare our portfolios for the inevitable market downturns and position ourselves for long-term success.

In conclusion, the stock market has crossed this threshold six times since 1871, and history couldn't be clearer about what comes next. As investors, we must stay informed, adapt our strategies, and remain patient in the face of market volatility. By doing so, we can navigate the ups and downs of the market and achieve our long-term investment goals.