One of the toughest realizations newer investors will eventually make is that stock market corrections occur frequently. Since the beginning of 1950, there have been 39 separate double-digit percentage declines in the broad-based S&P 500 (^GSPC +0.81%), based on data provided by Yardeni Research. That's a double-digit decline, on average, every 1.87 years.
But Wall Street doesn't adhere to averages. Downdrafts can occur anytime and without warning. Last year, the S&P 500, iconic Dow Jones Industrial Average (^DJI +0.73%), and growth-stock-focused Nasdaq Composite (^IXIC +1.03%) all plunged into respective bear markets and produced their worst full-year returns in more than a decade.
Image source: Getty Images.
The big question on everyone's mind (new and tenured investors alike) is: When will the current bear market end?
While there is no indicator or metric that can accurately and consistently time stock market bottoms, there are tools that offer strong correlations and impressive track records that can help investors make smarter investing decisions. One such tool is a market performance indicator.
This market performance metric hasn't been wrong in seven decades
After beginning 2022 with a thud and falling into a bear market, the S&P 500 put smiles on most investors' faces during the first quarter of 2023 with a return of 7% on the nose. However, it's not just the fact that the S&P 500 ended higher after a difficult year -- it's the magnitude of the gain.
According to Ryan Detrick, the Chief Market Strategist at Carson Group, gains of 7% or greater for the benchmark S&P 500 during the first quarter have been a harbinger of good news for full-year returns.
As you can see in Detrick's tweet below, there have been 17 instances over the past 70 years where the S&P 500 has gained at least 7% during the first quarter, including 2023. The S&P 500 ended the year higher all 16 previous instances. With the exception of 1987, the other 15 instances led to some level of gain in the S&P 500 between April 1 and December 31, relative to where the index ended during the first quarter.
This is interesting.
-- Ryan Detrick, CMT (@RyanDetrick) April 1, 2023
When the S&P 500 gained >7% in Q1, the full year has never been lower.
That is 16 out of 16 times the full year finished in the green, up 23.1% on avg. pic.twitter.com/FyIhar84jS
While it should be emphasized that past performance is no guarantee of future results, 16-for-16 is a data point with some weight behind it. If the consensus of this dataset were to hold true in 2023, the S&P 500 would end the year higher and more than likely build on its gains from the first quarter.
A more than half-century-long streak is about to end
What's particularly interesting about Ryan Detrick's dataset is that its implication -- i.e., stocks will end 2023 higher -- is in contrast to a number of recession-probability tools that have phenomenal track records of predicting economic downturns. Even though the stock market and the U.S. economy aren't linked at the hip, no bear market bottom after World War II has occurred prior to a recession being declared by the eight-economist panel of the National Bureau of Economic Research.
For example, the Federal Reserve Bank of New York has a tool it uses to forecast the likelihood of a U.S. recession within the next 12 months. This probability indicator measures the difference in yield (known as "spread") between the three-month and 10-year U.S. Treasury bonds to determine how likely it is that a recession will materialize.
When the Treasury yield curve inverts, it's often a signal that the economic outlook is deteriorating. Over the past 56 years, anytime the Fed's probability indicator has surpassed 40%, the U.S. has fallen into a recession. In March, this indicator hit a fresh high of 57.77%.
US ISM Manufacturing New Orders Index data by YCharts. Gray areas denote U.S. recessions.
Another indicator with an equally flawless track record over the past 70 years is the U.S. ISM Manufacturing New Orders Index. This subcomponent of the more-popular U.S. ISM Manufacturing Index examines new industrial orders on a monthly basis and is measured on a scale of 0 to 100, with 50 being the neutral baseline. A figure above 50 implies new industrial order expansion, while a figure below 50 signals contraction.
Looking back seven decades, anytime the U.S. ISM Manufacturing New Orders Index falls below 43.5, we've had a recession not long thereafter. In January 2023, this index fell to 42.5.
I've also expounded on the Conference Board Leading Economic Index (LEI), which takes 10 forward-looking inputs into account to forecast the likelihood of a U.S. recession. The LEI, which is measured on a rolling six-month basis to the comparable period in the previous year, was -4.2% in December 2022. Since 1949, anytime the LEI has dipped below -4%, a recession has materialized.
Chances are that either Wall Street's flawless performance indicator, or this trio of recession-probability metrics, will soon be proved wrong for the first time in more than a half-century.
Image source: Getty Images.
The closest thing to a guarantee you'll get on Wall Street
While valid arguments can be made from both bulls and bears as to where stocks could head in the next three, six, or 12 months, there's another dataset that offers what can be described as the closest thing to a guarantee you're ever going to get on Wall Street.
For years, market analytics company Crestmont Research has tracked and published data on the 20-year rolling total returns, including dividends paid, of the S&P 500. Crestmont's dataset is back-tested all the way to 1900, with 104 separate ending years (1919-2022).
The company's dataset shows that if you, hypothetically, bought an S&P 500 tracking index at any point since the beginning of 1900 and held for 20 years, you generated a positive total return 100% of the time. In many instances, you'd have a significant return. Whereas only a handful of the ending years produced an annualized return over the rolling 20-year period of 5% or less, approximately 40% of the years delivered an annualized return of at least 10.8%. At this return, investors are doubling their money, on average, every 6.7 years with dividend reinvestment.
The point is that anytime can be the ideal time to put your money to work on Wall Street if you have a long-term perspective. While nothing can be truly a given on Wall Street, Crestmont's dataset shows long-term investors of the S&P 500 -- and you might as well include the Dow Jones and Nasdaq Composite there as well -- have gone 104 out of 104 throughout history.
If you want to increase your chances of long-term success even more, consider buying dividend stocks. Companies that regularly dole out a dividend are usually profitable on a recurring basis and time-tested. Best of all, they've run circles around their non-paying peers over multiple decades.
No matter what Wall Street has in store for investors over the next couple of quarters, those with a long-term approach should be sitting pretty.
