Down 19%, Is It Safe to Invest in the S&P 500 Right Now?

For a short while earlier this month, it looked like the stock market was finally on the mend. So, BAM! Tuesday’s inflation report sent the S&P 500 (^GSPC -1.50%) it was down more than 4%, its worst day since mid-2020. That was a reminder that in environments like these, we can take nothing for granted.

However, before you allow such painful events to cause you to forgo stocks indefinitely, it’s worth taking a step back and looking at the big picture. Although there may be a little more downside to be spread, with the S&P 500 now almost 19% below its early January high, this may be the point where you should start thinking about buying stocks again, even after of Tuesday’s fall. .

A couple of indicators point me towards this conclusion.

Pushing through the headwind

Before we get to the heart of the matter, let’s get one thing straight: If you’re a speculator, swing trader, or short-term minded investor, this may not be the right time for you to invest money in stocks. As Tuesday’s strong sell-off made clear, the market is still vulnerable to negative headlines related to inflation and interest rates, and we cannot yet predict how the masses will initially view changes in either.

However, if you plan to hold your picks for a year or more into the future, there are two general arguments for viewing the current market level as a long-term entry point.

The broad market valuation is the first of these. According to data from Birinyi Associates, the S&P 500 currently has a trailing price of 21.8 and a forward price/earnings ratio of 17.6.

That 12-month multiple is actually a bit above the index’s recent average, but the average is also hurt by the abnormally low profits companies made during the first two quarters of this year due to unusually high inflation. . Economists expect those price increases to taper off soon, and afterward, analysts expect earnings growth to return to its long-term trajectory. In that context, today’s forward price-earnings ratio is below typical levels seen in recent years.

Data source: Standard & Poor’s. Table by author.

However, perhaps the most encouraging aspect of the data depicted on this chart is not the valuation of the S&P 500. It is the fact that despite all the economic headwinds currently blowing, analysts still collectively expect earnings from the S&P 500 broad market resume growth in the second half of this year and reach record levels again next year. As long as earnings continue to rise, the stock market should enjoy a long-term tailwind.

Time is not everything, but it is something

The other reason you may want to get back into stocks sooner rather than later? The calendar says we are close to bottoming out, even if we haven’t seen the exact bottom yet.

Be careful not to put too much faith in historical trends. On the other hand, don’t stubbornly ignore clear trends just on principle, either. One trend to certainly consider recognizing here and now is the fact that the upcoming month of October is often the so-called “bear killer.” That is, bear markets often end and new bull markets often begin in October, certainly more often than other months of the year.

And this time there is more to this hue than there normally could be. According to some numerical calculations by the Hartford Mutual Fund Company, since 1929, the average bear market has lasted an average of 289 days, or 9.6 months. Counting from early January, when the S&P 500 peaked, day 289 of this downtrend will come late this month or early next.

From that peak to the June low also marked a 23% loss, which is in line with (but not exactly close to) Hartford Funds’ finding that the average bear market takes a typical 36% toll on the market. On the other hand, many bear markets barely passed the 20% selloff milestone that is required to qualify for designation.

Of course, one more round of steep selling for the foreseeable future would give us high and low losses of over 30%. That could be the degree of capitulation required for a new bull market to start.

Don’t be stingy, but foolish

With all this said, don’t be fooled. If you’re a true long-term investor with an eye on things five or more years from now, it won’t matter much whether you enter now, next month, or even next year. But by doing it now, you’ll just be stepping in while shares are at a 19% discount, which is a good deal.

However, even if you’re not thinking that long in the long run, arguably you’d be better off getting back into the broad market now, even if we’re not at the exact bottom yet, because the biggest risk for investors is not being in when you should be. to be outside. It’s being outside when you should be inside. Arguably, we are closer to a major low point than otherwise, for the two reasons discussed above. Don’t think about it too much and end up losing it.

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