Whether you’re a Wall Street pundit or an everyday investor, 2022 has been a difficult year historically.of S&P 500 (^GSPC -2.80%)It is often viewed as a barometer of stock market health. NASDAQ Composite (^IXIC -3.80%) It was 34% below its mid-November high. In other words, both widely followed indices have entered a solid bear market.
These declines follow a back-to-back quarterly retracement in US Gross Domestic Product and a startling inflation rate of 9.1% in June 2022. decades.
History suggests further declines are likely for the S&P 500 and Nasdaq, but one investment strategy has been sure to make patient investors richer.
History is not on Wall Street’s side, at least in the short term
Before we get to the one solid strategy that hasn’t failed long-term investors for over 100 years (and countless times), let’s address the elephant in the room: history. Investors like stock markets on the rise, but his trio of indicators with a track record of bottoming out bear markets suggest the S&P 500 and Nasdaq Composite must fall further. .
For example, the use of margin debt forecasts each of the last three bear markets before they occurred. A “margin liability” is the amount an investor has borrowed, with interest, from a brokerage firm to buy or short a security. It is perfectly normal for margin liabilities to grow over time as the value of a stock increases, but it is not normal for outstanding margin liabilities to grow rapidly in a short period of time.
Since the beginning of 1995, there have been three instances in which margin liabilities have increased by at least 60% in the last 12 months (TTM). It happened just before the dot-com bubble burst that saw the S&P 500 eventually drop to 49% of its value. The financial crisis hit in 2007 and happened again just months before the S&P 500 fell to his 57% peak. Finally, it happens in 2021 and we have already seen the S&P 500 lose 24% of its value. This indicator suggests a more downward trend is likely.
The S&P 500’s Shiller price-to-earnings (P/E) ratio (also known as the cyclically adjusted P/E ratio, or CAPE ratio) is another short-term metric to watch. The Shiller P/E ratio looks at inflation-adjusted earnings over the past decade as opposed to the traditional His P/E ratio over TTM.
Since 1870, there have been five instances in which the S&P 500 Shiller P/E has held above 30 during a bull market (Shiller P/E reached 40 in January 2022). In four instances before it happened, the benchmark index fell between 20% and 89%. A Depression-like 89% drop is incredibly unlikely given the variety of monetary and fiscal tools available today, but if valuations are stretched, a bear market could be the bare minimum for the broader market. was expected.
A third metric of concern is the expected P/E ratio of the S&P 500. The forward P/E ratio looks at a company’s stock price (in this case, the index’s point value) and Wall Street’s projected earnings per share for the next fiscal year. Historically, the S&P 500 forward P/E ratio bottomed out between 13 and 14 during bear markets. It’s still at 16.3 as of last weekend, which suggests an additional downside.
This investment strategy has hit 1.000 for over a century.
But there is an investment strategy that has made bear market declines and stock market corrections an issue for more than a century. Above all, patience is all you need to succeed with this investment strategy.
Every year, stock market analytics firm Crestmont Research releases 20-year total return data, including dividends paid, for the S&P 500 going back to 1919. For example, if you want year-end 20-year total returns Crestmont’s latest report provides 20-year rolling total returns (shown as annualized averages) for all 103 year-end years from 1919 to 2021 .
result? If you bought the S&P 500 Tracking Index at any time since 1900 (important point) held that position for at least 20 years, you made money – and often it’s a good amount. Approximately 40% of the final year of 103 had total returns averaging 10.9% or more per year. By comparison, the S&P 500’s 20-year average annual total return fell below his 5% only a few times at the end of 103. This data is why billionaire Warren Buffett recommends investors buy his S&P 500 index his fund.
The two most popular index funds that utilize this seemingly foolproof investment strategy are: SPDR S&P 500 ETF Trust (spy -2.79%) and the Vanguard S&P 500 ETF (VOO -2.81%)Both index funds attempt to mirror the daily movements of the S&P 500, but with one notable difference. The SPDR S&P 500 ETF Trust has a fairly low net expense ratio of 0.09%, while the Vanguard S&P 500 ETF has a net expense ratio of only 0.03%, better than its competitors. In other words, in the Vanguard S&P 500 ETF, only $0.30 out of every $1,000 invested goes toward administrative expenses.
It’s a very small price to pay for the opportunity to ride the S&P 500 up and take advantage of an investment strategy that has been unstoppable for over a century.