The stock market has only been spotted three times in 154 years – and history reveals what will happen next


For more than two years, the stock market was virtually unstoppable. Last year, symbolic Dow Jones Industrial Average (djindices: ^dji)broadbass S&P 500 (snpindex: ^gspc)and is inspired by innovation Nasdaq Composite (Nasdaqindex: ^ixix) All three indexes achieved multiple record closing highs, with 13%, 23% and 29% higher, respectively.

Investors didn’t have to dig deeper to find a catalyst to fuel this expanded gathering with stocks. In no particular order, current bull market powder casks include:

  • The rise of artificial intelligence (AI).

  • Corporate revenues are better than expected.

  • Pullback of general speed of inflation from 4 years high.

  • A resilient US economy.

  • Donald Trump has returned to the White House.

  • Stock splits around investors Euphoria.

There is nothing to delay this bull market rally, but history often shows that when things seem too good, they are usually.

A person who draws arrows and circumbles at the bottom of a sudden decline in the stock chart.
Image source: Getty Images.

At any time, there are data points, metrics, or forecasting tools that spell out the potential troubles of the US economy and Wall Street. Some of the most recent examples include the first notable year-over-year decline in US M2 money supply since Great Fear Presion, and the longest yield inversion on record.

But no one in the stock market’s “what if” is more of a cry of a valuation tool that has only made history three times in 154 years.

As the old idiom states, “value is in the eyes of the seer.” Value is a relatively subjective term, and what one investor considers to be expensive can be considered a bargain by another investor.

Wall Street’s traditional evaluation tool is Price and revenue (P/E) ratiosplits the company’s stock price into 12-month profit. P/E ratios are a quick value comparison tool for mature businesses, but they don’t work particularly well with growth stocks and can easily be distorted in turbulent events such as the Covid-19 pandemic.

A rather comprehensive assessment tool that allows for Apples-to-Apples comparisons is the Schiller P/E ratio of the S&P 500, also known as the cycle-adjusted P/E ratio, or CAPE ratio. Schiller’s P/E is based on average inflation-adjusted revenue over the past decade, so shock events cannot distort measurements.

S&P 500 Syrah Cape Ratio Chart
S&P 500 Syrah Cape Ratio Data based on data YCHARTS.

When the closing bell rang on February 5th, the S&P 500 Schiller P/E crossed the finish line with a 38.23 read. In the context, the average reading of Schiller P/E when backtested in January 1871 was only 17.2.

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