Always be prepared, but stay the course.
Always be prepared, but stay the course.
Based on the S&P 500 (^GSPC +0.33%), the market has been on a roll since the bear market in 2022. Since it hit its trough on Oct. 12, 2022, the index is up over 91%. These gains have been rewarding, but they've also made the market expensive, which has worried some investors.
The Shiller P/E ratio is one way to gauge how expensive the market is. It looks at the average inflation-adjusted earnings of S&P 500 companies over the past 10 years. Zooming out a decade and adjusting for inflation removes one-off years and provides perspective on long-term valuation trends.
As of the beginning of October, the Shiller P/E ratio was 40.7, the highest it has been since the dot-com bubble. During that time, the Shiller P/E ratio stayed above that mark from most of 1999 through mid-2000. Unfortunately, we know how the dot-com bubble ended: The S&P 500 fell around 49% between March and October 2022.
Shiller CAPE Ratio data by YCharts
Given how expensive the current market is and how it historically compares to one of the most significant crashes in stock market history, should investors start preparing for a repeat? While it's always better to be overprepared than underprepared, that's the wrong mindset.
More of a feature than bug
When it comes to stock market crashes, the first thing investors need to realize is that they're inevitable. The length and severity vary widely, but they have always happened, and they'll keep happening. Whether it's short and sharp like the COVID-19 crash, which lasted 33 days and saw the market drop around 34%, or drawn out like the dot-com crash, which lasted around 929 days, a crash is a natural part of the stock market cycle.
While it might sound backward, a market crash isn't always the worst thing for long-term investors. On one hand, it can be a clearance sale, putting you in a position to scoop up shares at a lower price than before. On the other hand, if the market never dropped, valuations would be really unsustainable, and long-term upside would be severely limited.
Granted, this isn't quite the case for people nearing or in retirement who may need to cash out shares soon. But that highlights the importance of proper allocation and a cash cushion to lean on. You don't want to be forced to sell shares while they're down.
Averytin News Financial update.