Is Now the Best Time to Buy Stocks? 2 Bullish Signals in This Bear Market

The Federal Reserve has taken drastic steps to rein in galloping inflation. In September, the central bank raised its benchmark interest rate for the fifth time this year as Fed officials voted in favor of a third consecutive 0.75% rate hike. Interest rates are now rising at a pace not seen since the 1980s, and projections from Fed officials imply further rate hikes before the end of 2022.

That news left already-alarmed investors feeling more pessimistic about the economy. On one side, rampant inflation could slow consumer spending and weaken the profits of countless companies, setting in motion a vicious cycle that could tip the U.S. economy into a recession. But on the other side, the Federal Reserve's aggressive monetary policy to slow inflation could also slow consumer spending, bringing about the exact same outcome.

Investors have battled those fears all year, leading to a profound downturn in the stock market. The S&P 500 is currently 21% off its high, and the Nasdaq Composite is down 30%. Those sharp declines put both widely followed indexes into bear market territory.

Unfortunately, it is impossible to know when the situation will improve. The downturn could drag on for months or even years before the market finally rebounds. But two bullish data points suggest that now is still a good time for patient investors to buy stocks.

The stock market looks cheap from a historical perspective

Investors often use price-to-earnings (P/E) ratios to evaluate individual stocks. A P/E ratio is akin to a price tag. It quantifies the amount an investor would pay per share for each dollar of a company's earnings. That information can help potential buyers (or sellers) decide whether a particular stock is cheap or expensive. The same principle can be applied to the entire stock market.

The chart below shows the average S&P 500 P/E ratio over the last one, two, and five decades. For context, the S&P 500 had a P/E ratio of 18.1 at the end of September 2022, according to Nasdaq Data Link.

Data source: Nasdaq Data Link.

As indicated above, the S&P 500 -- which is often used as a proxy for the broader U.S. stock market -- is currently trading at a discounted valuation compared to its long-term average. In other words, at 18.1 times earnings, the stock market looks cheap from a historical perspective, and that is a compelling argument in favor of buying stocks or index funds right now.

The stock market's best days are often during bear markets

Missing even a few of the stock market's best days can lead to significant underperformance. For instance, if you had invested $10,000 in the S&P 500 on Jan. 1, 2002, your portfolio would have been worth $61,685 by Dec. 31, 2021, according to analysts at JPMorgan Chase. That represents a return of 517% over two decades. However, if you had missed the 10 best days during that time, your portfolio would have grown just 183% to $28,260.

For context, the chart below lists the exact dates and returns generated by the S&P 500 on its 10 best days over the last two decades.

Data source: JPMorgan Chase, Yardeni. *During a bear market. **Day after a bear market bottomed.

Here is the big takeaway: Six of the stock market's 10 best days since 2002 actually occurred during bear markets. Those dates are marked with a single asterisk in the chart above. Similarly, two of the stock market's 10 best days since 2002 took place on the day following a bear market's bottom. Those dates are marked by two asterisks.

In short, many of the market's best days take place during bear markets (or in close proximity to bear markets), and missing those days could dramatically lower your portfolio's total returns in the long run. That information is another compelling argument in favor of buying stocks right now.