For a short while earlier this month, it looked like the stock market was finally on the mend. Then, WHAM! Tuesday's inflation report sent the S&P 500 (^GSPC -0.22%) down by more than 4% -- its worst single day since the middle of 2020. That was a reminder that in environments like these, we can take nothing for granted.
Before you let such painful events cause you to swear off stocks indefinitely though, it's worth taking a step back and looking at the bigger picture. Although there may be a bit more downside left to dish out, with the S&P 500 now down nearly 19% from its early January high, this may be the point where you should start thinking about buying stocks again, even in the wake of Tuesday's plunge.
A couple of indicators point me toward this conclusion.
Pushing through the headwind
Before we get to the nitty-gritty, let's be clear about one thing: If you're a speculator, a swing trader, or a short-term-minded investor, this may not be the right time for you to plow money back into stocks. As Tuesday's sharp sell-off made clear, the market is still vulnerable to negative headlines linked to inflation and interest rates, and we still can't predict how changes to either will be initially viewed by the masses.
If you're planning on holding your picks for a year or more down the road, though, there are two overarching arguments for seeing the market's current level as a long-term entry point.
The broad market's valuation is the first of these. According to data from Birinyi Associates, the S&P 500 is currently priced at a trailing price-to-earnings ratio of 21.8 and a forward price-to-earnings ratio of 17.6.
That trailing-12-month multiple is actually a bit above the index's recent average, but the average is also being weighed down by the abnormally low profits businesses earned during the first couple of quarters of this year due to unusually high inflation. Economists expect those price increases to be curbed soon, and subsequently, analysts expect earnings growth will make its way back to its long-term trajectory. In that context, today's forward price-to-earnings ratio is actually below the typical levels seen in recent years.
Data source: Standard & Poor's. Chart by author.
Perhaps the most encouraging aspect of the data plotted on this chart, however, isn't the S&P 500's valuation. It's the fact that despite all the economic headwinds currently blowing, analysts still collectively expect the broad market's earnings to resume growth in the latter half of this year, and to reach record levels again next year. As long as earnings are on the rise, the stock market should enjoy a long-term tailwind.
Timing isn't everything, but it's something
The other reason you may want to step back into stocks sooner than later? The calendar says we're near a bottom, even if we've not seen the exact bottom quite yet.
Be wary of putting too much faith in historical tendencies. On the other hand, don't stubbornly ignore clear tendencies just on principle either. One tendency to certainly consider acknowledging here and now is the fact that the coming month of October is often a so-called "bear killer." That is to say, bear markets often end and new bull markets often begin in October -- certainly more often than in other months of the year.
And there's more to this nuance this time around than there typically might be. According to some number-crunching done by mutual fund company Hartford, since 1929, the average bear market has lasted an average of 289 days, or 9.6 months. Counting from early January, when the S&P 500 peaked, day 289 of this downtrend will arrive around the end of this month or the beginning of next month.
From that peak to June's trough also marked a 23% loss, which is within sight of (but not exactly close to) Hartford Funds' finding that the average bear market takes a typical 36% toll on the market. On the flip side, plenty of bear markets barely surpassed the 20% sell-off milestone that is required to qualify for the designation.
Of course, one more round of steep selling in the foreseeable future would give us peak-to-trough losses in excess of 30%. That could be the degree of capitulation required for a new bull market to begin.
Don't be penny-wise but pound-foolish
With all of that being said, don't be misled. If you're a true long-term investor with your eyes on things five or more years down the road, whether you step in now, next month, or even next year won't really matter much. But by doing so now, you'll simply be stepping in while stocks are discounted to the tune of 19%, which is a good deal.
Even if you're not thinking quite that long-term though, you'd still arguably be better served to wade back into the broad market now, even if we're not at the precise bottom yet, because the bigger risk to investors isn't being in when you should be out. It's being out when you should be in. We're arguably closer to a major low than not, for both reasons discussed above. Don't overthink it and end up missing out.
