What has been the historical performance of the stock market compared to real estate and Treasury bonds?
What recent events have contributed to the volatility in the stock market?
How do changes in tariff policies potentially impact U.S. goods and inflation?
What does the current high Shiller P/E ratio indicate about stock valuations?
How have major stock index performances correlated with past periods of heightened volatility?
For more than a century, the stock market has been the premier wealth-builder for investors. While real estate, Treasury bonds, and various commodities, such as gold, silver, and oil, have all risen in nominal value, none have come particularly close to rivaling the annualized return of stocks over the very long run. But there’s a price of admission that comes with this top-tier wealth creator: volatility.
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Over the last two months, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) and broad-based S&P 500 (SNPINDEX: ^GSPC) have fallen into correction territory with double-digit percentage declines. Meanwhile, the innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) officially dipped into a bear market, as of the closing bell on April 8.
While some corrections in the broader market are orderly (e.g., the near-bear market for the S&P 500 in the fourth quarter of 2018), others take the elevator-down approach. The previous three weeks of trading activity saw the Dow, S&P 500, and Nasdaq Composite log some of their largest single-session point and percentage gains and declines in their respective histories.
This outsized volatility has the benchmark S&P 500 on track to do something that’s occurred only four times since 1940. The best thing about this rare and sometimes scary event is that it sends a very clear message to investors of what comes next for stocks.
Before unearthing the ultra-rare event the S&P 500 has an opportunity to duplicate in 2025, it pays to understand the catalysts fueling this historic bout of volatility on Wall Street. It effectively boils down to three sources of fear and uncertainty for investors.
First, there’s President Donald Trump’s "Liberation Day" tariff announcements on April 2nd. Trump implemented a sweeping global tariff of 10%, as well as set higher reciprocal tariff rates on a few dozen countries that have historically run unfavorable trade imbalances with the U.S.
Even though President Trump placed a 90-day pause on these higher reciprocal tariffs for all countries but China, there’s a real risk of trade relations with China and our allies worsening in the immediate future. This could adversely impact demand for U.S. goods beyond our borders.
The president and his administration haven’t done a particularly good job of differentiating between output and input tariffs, either. The former is a duty placed on a finished product, whereas the latter is an added tax on something used to manufacture a finished product in the U.S. Input tariffs threaten to increase the prevailing rate of inflation and might make American-made goods less price-competitive with those being imported.
Secondly, the historic priciness of stocks is fueling volatility on Wall Street. In December 2024, the S&P 500’s Shiller price-to-earnings (P/E) Ratio (also known as the cyclically adjusted P/E Ratio, or CAPE Ratio), hit its current bull market multiple high of almost 39. This is well above its average multiple of 17.23, when back-tested to January 1871.
Over the last 154 years, there have only been a half-dozen instances where the S&P 500’s Shiller P/E surpassed 30 and held that level for at least two months. Following the previous five occurrences, at least one of Wall Street’s major stock indexes lost 20% (or more) of its value.
In other words, the Shiller P/E makes clear that the stock market is running on borrowed time when valuations become overly extended to the upside.
The third factor inciting whiplash on Wall Street is rapidly rising longer-term (10- and 30-year) Treasury bond yields. One of the steepest moves higher in decades for long-term Treasury bond yields implies concern about inflation and points to borrowing potentially becoming costlier for consumers and businesses.
With a clearer understanding of why stocks are vacillating wildly in recent weeks, let’s turn back to the S&P 500’s attempt to make history in 2025.
Based on data collected by Charlie Bilello, the Chief Market Strategist at Creative Planning, the 2.2% decline registered by the S&P 500 on April 16 marked the 18th time this year the index has fallen by at least 1% during a single session. For context, the average number of 1% or greater single-day declines in a given year over the last 97 years (1928-2024) is 29.
While declines of 1% or greater were a very common occurrence during the Great Depression and in the years immediately following it, large clusters of big down days have been somewhat rare over the last 85 years. Between 1940 and 2024, there have been only four years where the grand total of large down days (at or exceeding 1%) topped 56:
- 1974: 67 large down days
- 2002: 72 large down days
- 2008: 75 large down days
- 2022: 63 large down days
These periods coincide with the OPEC oil embargo of the mid-1970s, the tail end of the dot-com bubble bursting, the height of the Great Recession, and the 2022 bear market.
Through 106 calendar days (i.e., through the closing bell on April 16), the S&P 500 has endured 18 large down days, or one every 5.89 calendar days. If this ratio holds throughout 2025, the S&P 500 is on track to decline by 1% or more during 62 trading days this year. This level of downside volatility is quite rare for the benchmark index — but it also offers a huge silver lining.
Each of these rare periods of heightened downside volatility represented a surefire buying opportunity that handsomely rewarded optimists:
- After 1974, and including dividends, the S&P 500 rose by 31.6% one year later, 38.7% three years later, and 57.4% five years later.
- After 2002, and including dividends, the S&P 500 soared by 28.7% one year later, 49.7% three years later, and 82.9% five years later.
- After 2008, and including dividends, the S&P 500 jumped by 26.5% one year later, 48.6% three years later, and 128.2% five years later.
- After 2022, and including dividends, the S&P 500 gained 26.3% one year later.
On average, the S&P 500’s total return was 28.3% in the year following a period of outsized downside volatility. More importantly, the benchmark index rose 100% of the time at the one-, three-, and five-year marks (when applicable).
Based solely on what this historical data tells us, a short-lived period of large down days for the S&P 500 represents a surefire opportunity for optimistic long-term investors to put their money to work.
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The S&P 500 Is on Track to Do Something That’s Happened Only 4 Times in 85 Years — And It Offers a Very Clear Message of What’s Next for Stocks
As of late 2023, the S&P 500 is entering a critical juncture that has analysts and investors alike drawing parallels to only four notable occurrences in the past 85 years. Historically, the performance of the S&P 500 can serve as a barometer not only for the health of the U.S. economy but also for the future trajectory of global markets as a whole. Currently, with the index on track to repeat a phenomenon seen only on rare occasions since its inception in 1937, the implications for stock investors are profound.
Historical Context
To understand the significance of what’s occurring in the S&P 500, we first need to look back at those four past instances. The S&P 500 is not just a stock index; it reflects the largest companies in the U.S. economy. Consequently, fluctuations in the index can indicate shifts in investor sentiment and macroeconomic conditions.
The four occurrences that merit attention were marked by either exceptional market decline followed by a strong recovery, prolonged stagnation before a major bullish market, or periods of great volatility settled by a shift to stability. Each of these instances resulted in significant turnarounds in market performance and investor confidence.
Post-Great Depression Recovery (1937-1945): After the market crash of 1929 and subsequent years of economic despair, the S&P 500 slowly began to recover during the late 1930s, culminating in a full-blown bull market during World War II.
The Inflationary Recession (1970s): The 1970s bore witness to stagflation, where inflation and stagnation occurred simultaneously. After several volatile years, the market solidified into a long-term bull run leading into the 1980s.
Dot-Com Bubble to Financial Crisis (2000-2008): After the bursting of the dot-com bubble in 2000, the S&P 500 faced considerable turbulence, finally gaining stability in the latter part of the 2000s before entering a historic bull run post the 2008 financial crisis.
- COVID-19 Pandemic Recovery (2020-2021): After the sharp decline associated with the pandemic and the economic lockdowns, the S&P 500 staged one of the quickest recoveries in history, bolstered by sweeping fiscal stimulus and innovations in digital technology.
Current Market Dynamics
The S&P 500 has recently been characterized by heightened volatility due to a multitude of factors: rising interest rates, inflation concerns, geopolitical tensions, and supply chain disruptions. Yet, as we approach the end of 2023, signals are emerging that the market is on the verge of stabilizing and potentially entering another bullish phase. This reflects the behavior observed in the four historical instances, leading to questions regarding how it may shape the near-term future.
What makes the current scenario particularly unique is the blend of technological innovation and shifts in consumer behavior post-pandemic. The pandemic catalyzed substantial changes in industries ranging from e-commerce to telehealth, fundamentally altering the economic landscape. Small- to medium-sized companies have adapted agility, while large players in technology have amassed significant market share, but caution remains prevalent among investors.
The Clear Message Ahead
The potential of the S&P 500 to contribute to a renewed bull market is underscored by a few key indicators:
Resilient Corporate Earnings: Companies within the S&P 500 have shown remarkable resilience in their earnings reports, even amidst adversity. Increased revenues paired with strategic cost management could lead to better-than-expected profitability, which is crucial for maintaining investor confidence.
Interest Rate Sensitivity: The current rate environment is volatile but has shown signs of stabilizing. Future Federal Reserve actions will be crucial in this regard. If rates hold steady or decrease slightly, it could stimulate both consumer spending and corporate investment, propelling market growth.
Investor Sentiment: Sentiment analysis based on the current behavioral trends of retail and institutional investors indicates a growing appetite for equities, despite the prevailing uncertainty. An uptick in investment could serve as a catalyst for upward momentum in the S&P 500.
- Global Economic Recovery: With many economies around the world recovering from the pandemic, symbols of renewed growth and trade partnerships are reigniting hope among investors. A global recovery would support U.S. exports and, in turn, benefit the companies listed in the S&P 500.
Conclusion
As we approach an era where the S&P 500 is poised to replicate a pattern seen during moments of significant historical recovery, investors must keep a close eye on market indicators, fiscal policies, and corporate performance. Though past performance is not always indicative of future results, the unique conditions that are converging suggest that stock market volatility could soon give way to renewed optimism.
The S&P 500’s current trajectory may just be the prelude to a new era of growth, but as history shows us, informed caution blended with proactive strategies will be essential as we navigate these developing waters.
The S&P 500 is currently showing trends that mirror patterns observed only a handful of times over the past 85 years. Historically, these occurrences have forecasted significant movements in the stock market. Investors and analysts are closely monitoring these indicators, as they may provide insight into forthcoming market behavior.
The rare nature of these patterns in the S&P 500 emphasizes the importance of understanding market cycles and investor sentiment. Previous instances have often led to substantial market shifts, indicating that current developments could be pivotal for both short-term and long-term investors.
In analyzing these patterns, it’s crucial to consider various economic factors, including interest rates, inflation, and corporate earnings, which can all influence stock performance. The correlation between historical market movements and current trends reinforces the idea that the S&P 500 could be poised for a significant shift.
Careful consideration of these indicators will be essential for navigating the evolving market landscape. Investors might want to prepare for potential volatility or opportunities that arise from such unprecedented patterns in the near future.