Tuesday, October 19, 2021

Stakes Are High! S&P 500 Might Soon Plummet. Are Investors Ready?

After a historic bullish market despite the global COVID-19 outbreak, predictions are that the stock market might soon hit a notable bearish road. The past 13 months, even more, have been a euphoric ride for S&P 500 index, ending the year with an impressive 16.3% gains along with aggregate returns with dividend amounting to 18%. Apple and Microsoft led the performance while the Dow Jones Industrial Average soared at 7.2%.

However, the good golden days are soon to meet a downbeat if the data and market trends are to be believed.

So, what does the stock market prediction says?

In every 1.87 years on average, Wall Street hits a double digit downfall in the S&P 500 index, starting from 1950. And this year, the market has got all the more reasons to believe that bearish phase might just be near. Trend goes like this- S&P 500 charting a bear-market bottom in the period of three years are often met with an unmerciful market wrath.

We are still awaiting the post-pandemic bear market. According to the data provided by Yardeni Research, the S&P 500 has witnessed as many as eight bearish phases since 1960 with a drop of minimum 20%. After the onset of the each bear market bottom succeeding the downbeat phase, S&P 500 recovered by at least 10%, given the time period of at least three years.

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So far, 13 such aggregate recoveries or corrections have been recorded after above mentioned 8 bear markets in the span of three years each.

The Groundbreaking Valuation of 2020

Other than the natural correction that stock market goes through every 1.5-2 years, the groundbreaking valuation of S&P 500 in the past 14 months is also an indicator that we are moving towards a bear market.

S&P 500’s Shiller price-to-earnings (P/E) ratio is the tool used to calculate average inflation-adjusted earning over the period of past 10 years. A Shiller P/E above 30 is actually an ill-omen for the Wall Street. The last four times Shriller P/E touched the mark of 30 amid a sustained bull market, S&P 500 plummeted 20-80%. The Shriller P/E for the S&P 500 as recorded on May 8 stood at 37.53, which is more than twice the average since 1970.

Now that we are sure that a bear market hovers above Wall Street like a hat, what should the investors do?

To begin with, keep your financials ready to not miss out on the huge moneymaking opportunity the bear market will bring along. Keep enough cash flow ready so as to grab the opportunity as and when it occurs. If you succeed in buying promising ETFs and build your capacity to let them bake and not withdraw, your portfolio might just have a bright future ahead. Keep your eye on growth stocks but do not underestimate the value stocks that, according to Bank of America, have aggregated the annual gain of 17% for almost 90 years now.

And with that, definitely don’t avoid dividend stocks. Companies that offer dividends are often less appealing in terms of growth pace as compared to small-cap stocks or highly promising companies. However, companies rolling out dividends are highly trustworthy and time-tested. With a guaranteed profit rollout, you might find your safe haven in dividend stocks during a market crash.

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