From Monday the S&P500(SNPINDEX: ^GSPC) increased by approximately 27% in 2024. That’s a phenomenal performance after an already strong year in 2023, when the price rose 24%. It is impressive, but at the same time raises the question of whether the market is due for a correction.
While the stock market is doing well, there are three worrying numbers that investors should pay close attention to, as they could be an indication of how bloated the index has become and why a crash may be overdue.
The index has been doing well for a number of years, much better than normal: the long-term average annual return is around 10%. What is remarkable is that in five of the past six years, with 2022 as the only exception, it has increased by at least 16%.
Year
Yield
2024
26.9%*
2023
24.23%
2022
(19.44%)
2021
26.89%
2020
16.26%
2019
28.88%
Data source: YCharts. *Current returns as of December 9.
To put into context how outstanding this is, prior to the years mentioned above, the S&P 500 has achieved this performance (16% return or more) five times in the past 20 years. Such large returns have typically been spread out over the years, not lumped together as has been the case recently. These are not typical returns for the market, and the risk is that investors do expect them, which could lead to overly high expectations for next year.
While recovery years are not unusual after a tough year like the one the market experienced in 2022, it has more than made up for that downturn with many top growth stocks and the S&P 500 now trading at record levels.
Another way to highlight the S&P 500’s impressive performance is to simply look at its impressive gains since 2019. If you had invested in the index back then, you would have more than doubled your money as it is up 166% (including dividends). during that time frame.
^SPX data by YCharts
That equates to a compound annual growth rate of 17.7%, which is much higher than the long-term average of just 10%. This takes into account the bad year in 2022 and shows how well the market has done even with such poor performance in those results.
The Shiller price-to-earnings (P/E) ratio is an effective way to measure how expensive stock market valuations are because it compares the S&P 500 to the past ten years’ inflation-adjusted earnings. This softening effect can give investors a better long-term perspective on how expensive valuations currently are.
Currently the ratio is around 38.5, which is well above the historical average of 17. The last time this ratio was around these levels was in 2021, and the S&P 500 would continue to crash the following year. Before that, Shiller’s price-to-earnings ratio peaked at 44 in 1999, just before the dot-com crash.
Before the Great Recession of 2008-2009, interest rates were also at a higher level (over 20), but even that wasn’t as extreme as where the Shiller price-to-earnings ratio is now. It’s by no means a perfect indicator that a major crash is coming — it’s typically been well above 20 for the past decade and rising as it goes — but it can serve as an important reminder to investors of just how expensive stocks are right now. .
Regardless of whether you think there will be a market crash next year, it’s never a bad idea to periodically evaluate your portfolio to see if there are better investment opportunities to consider.
If a stock has reached an extreme valuation where it could be very vulnerable to a correction, and there is potentially a more attractive growth stock to invest in, it may make sense to change positions in your portfolio. You may also want to put more money into dividend-paying stocks that can generate recurring income to offset a possible decline in the value of your portfolio. What you don’t have to do that It’s completely taking money out of the stock market and waiting for a crash before buying back into it. Trying to time the market can cause you to miss out on profits by waiting.
To make your portfolio safer next year, consider investing more money in bonds, dividend-paying stocks or exchange-traded funds, which can provide greater safety and diversification. Even if you’re worried about a market crash, you can still stay invested and simply adopt a safer strategy.
Consider the following before purchasing shares in the S&P 500 Index:
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
3 Regarding Numbers Indicating the S&P 500 Could Expect a Crash was originally published by The Motley Fool
