Stock Market Hits Rare Milestone Seen Only 3 Times in History – Here's What Could Happen Next
By Sean Williams
Published: November 17, 2024, 5:06 PM GMT+7
The stock market is soaring to new heights in 2024. Since the start of the year, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have surged by 17%, 26%, and 28% respectively (as of November 13). These gains have propelled all three major indexes to multiple record highs, capturing the attention of investors worldwide.
This rally has been fueled by a combination of factors:
- Excitement over the rapid growth of artificial intelligence (AI) technology.
- Optimism surrounding President-elect Donald Trump’s second term.
- Renewed enthusiasm for stock splits, which have boosted investor interest.
However, when markets seem unstoppable, history warns that caution is warranted.
A Historic Event Unfolds in the Stock Market
Throughout the year, numerous warning signs have hinted at underlying economic challenges. Among them:
- The first decline in U.S. M2 money supply since the Great Depression.
- The longest yield-curve inversion on record.
- Historical trends tied to Federal Reserve interest rate cuts.
Yet, one specific metric—the Shiller P/E ratio, also known as the CAPE ratio—stands out as a key indicator. This metric, which adjusts earnings data for inflation over the past 10 years, has proven highly reliable in evaluating market valuations across history.
On November 13, the Shiller P/E ratio for the S&P 500 reached 38.18—more than double its historical average of 17.17, which dates back to 1871.
This is only the third time in history the Shiller P/E has reached these levels during a bull market:
- December 1999: During the dot-com bubble, the Shiller P/E peaked at 44.19.
- Early 2022: The ratio briefly surpassed 40 before markets entered a bear phase.
- Now, November 2024: The current reading of 38.18 raises eyebrows among analysts.
Historical Patterns: What Comes After High Valuations?
History provides some insight into what typically follows periods of extreme overvaluation:
- Dot-com bubble (1999-2000): The S&P 500 fell 49%, while the Nasdaq plummeted even further.
- 2022 bear market: Following a Shiller P/E above 40, all three major indexes—Dow, S&P 500, and Nasdaq—entered steep bear market declines.
In fact, since 1871, the Shiller P/E has exceeded 30 only six times, including the present. Each time, the markets eventually experienced downturns ranging from 20% to 89%.
While this metric doesn’t predict the timing of corrections, its flawless track record suggests that high valuations are often followed by significant declines.
Why Long-Term Perspective Is Crucial
For investors, it’s important to keep perspective. Although corrections and bear markets are inevitable, they are typically short-lived.
Here’s what history shows about economic and market cycles:
- Recessions: Since World War II, most U.S. recessions have lasted less than a year, with none exceeding 18 months.
- Economic expansions: In contrast, two expansions since WWII have lasted over a decade, and the economy spends far more time growing than contracting.
The same is true for the stock market:
- The average bear market for the S&P 500 lasts about 286 days (roughly 9.5 months).
- By comparison, the average bull market spans 1,011 days (nearly three years).
While downturns can be unsettling, patience and a long-term outlook are often rewarded.
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Sean Williams does not own shares of the stocks mentioned. The Motley Fool has no positions in these stocks and adheres to a strict disclosure policy.
This article is based on insights published by The Motley Fool.
