The Shiller P/E Ratio: A Historical Indicator of Stock Market Volatility and Long-Term Investing Opportunities

When the stock market experiences volatility, investors often seek clues to predict the future direction of the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. A comprehensive forecasting tool that has been tested for 154 years suggests potential trouble for these major stock indexes. However, history shows that long-term, optimistic investors tend to fare better.

One reliable forecasting tool is the S&P 500's Shiller P/E Ratio, which is based on average inflation-adjusted earnings per share over the trailing decade. This ensures that recessions don't skew the results. As of June 18, the S&P 500's Shiller P/E Ratio stood at 36.55, which is 112% above the average of 17.25 from 1871. When the Shiller P/E has surpassed and held a multiple of 30 for at least two months, it has only occurred six times in 154 years, and all previous instances were followed by declines ranging from 20% to 89% in the major stock indexes.

Despite these concerning forecasts, history shows that the stock market as a whole tends to climb over long periods. A separate analysis by Crestmont Research found that all 106 rolling 20-year periods examined generated positive annualized total returns, including dividends paid. This demonstrates the power of buying stocks and holding them for the long term.

In conclusion, while short-term market movements can be unpredictable, history shows that long-term investing is a profitable strategy. Before investing in the S&P 500 Index, consider the latest top 10 stocks recommended by The Motley Fool Stock Advisor, which could produce significant returns in the coming years. Don't miss out on this opportunity to grow your investments – join Stock Advisor today!