If the past few years have proved anything, it's that trying to decipher directional movements in the stock market over the short run can be difficult. Since the beginning of the decade, investors have contended with:

  • The 2020 COVID-19 crash, which sent the iconic Dow Jones Industrial Average (^DJI 0.40%), benchmark S&P 500 (^GSPC 1.02%), and growth-fueled Nasdaq Composite (^IXIC 2.02%) screaming into a bear market in a matter of weeks
  • A furious bull market rally in 2021 that lifted all three major indexes to multiple record-closing highs
  • Yet another bear market in 2022, which saw the Nasdaq Composite shed 33% of its value by year-end
  • A return of the running of the bulls in 2023, at least for megacap growth stocks

What's more, a variety of indicators and predictive tools with generally successful track records of calling directional moves in the Dow, S&P 500, and Nasdaq Composite are mixed.

A businessperson closely reading a financial newspaper.

Image source: Getty Images.

These predictive Wall Street metrics are all over the map

For example, following the money appears to show that the U.S. economy is in danger of falling into a recession. U.S. commercial bank lending and M2 money supply are two catalysts that could weaken corporate earnings and send the major indexes lower.

Generally speaking, the aggregate amount of U.S. commercial bank loans will steadily rise over time. Banks are incented to lend to cover the costs associated with taking in deposits. But in those rare instances where commercial banks tighten their lending standards and commercial bank credit declines by at least 1.5% from an all-time high, trouble typically follows.

There have been four instances in the past 50 years where bank lending has tapered by at least 1.5%, including right now. The previous three instances all saw the broad-based S&P 500 lose around half its value. If banks aren't willingly lending like they once were, it's a pretty clear signal of caution for Wall Street.

Likewise, M2 money supply is shrinking by a meaningful amount (at least 2%) for only the fifth time in history, dating back to 1870. M2 money supply refers to everything in M1 (cash and coins in circulation, along with demand deposits from a checking account), and adds in savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000.

A decline in M2 with an above-average inflation rate is a worrisome combination. It means consumers have less cash available to make discretionary purchases, which, in the past, has sent the U.S. economy tumbling into deflationary downturns.

But there's another side to this coin. Chief Market Strategist Ryan Detrick of Carson Group has highlighted numerous datasets this year that suggest the strong performance of the major indexes is no fluke -- but rather, the beginning of a new bull market.

For instance, there have been 14 previous instances (i.e., excluding the current situation) since 1985 where the Nasdaq 100 -- an index of the 100 largest nonfinancial companies listed on the Nasdaq exchange -- has gone more than six months without making a new 52-week high. Once it finally did make a new 52-week high, the Nasdaq 100 was higher one year later 100% of the time (14 out of 14).

Additionally, U.S. economic growth has come in considerably stronger than expected, and the U.S. unemployment rate remains historically low.

One group of datasets is prescient, while the other is all wet. Deciding which is which, with any sustained accuracy, can be challenging.

This is the most important investment chart you'll ever see

While stock market vacillations can make even tenured investors question their resolve, there's one investment chart that puts everything into perspective. It's easily the most important investment chart you'll ever see and comes courtesy of Bank of America Global Research.

Recently, BofA Global Research examined the probability of an investor generating negative returns in relation to the total returns (i.e., including dividends paid) of the S&P 500 since the start of 1929. A total of eight holding periods were examined, as shown below. 

A bar chart showing a decline in negative total returns the longer an investor holds their position in the S&P 500.

Data source: Bank of America Global Research. Chart by author.

Keep in mind that investors can't directly purchase an index like the S&P 500, so the equivalent here would be to think about a hypothetical investor purchasing an index fund like the SPDR S&P 500 ETF Trust or Vanguard S&P 500 ETF, which attempt to mirror the performance of the benchmark S&P 500.

Over the past 94 years, if you had invested in the S&P 500 for a single day, you would have made money 54% of the time and lost money 46% of the time. Extend that holding out to one month or a quarter (three months), and your probability of a loss declined to 38% and 32%, respectively. Hold an S&P 500 tracking index for a year, and you made money, including dividends, 75% of the time.

The key point here is that the longer your holding period extends, the greater probability you have of generating a positive total return. In other words, time in the market matters considerably more than trying to time the market.

Market analytics company Crestmont Research offers a similar dataset but takes its analysis a step further. It examined the 20-year rolling total returns of the S&P 500 dating back to 1900.

Even though the S&P didn't exist prior to 1923, Crestmont was able to trace its components back to other indexes before 1923 in order to gather accurate total return data to the start of the 20th century. This left Crestmont with 104 ending years of total returns data to comb through (1919-2022). 

What Crestmont found was that all 104 ending periods produced a positive total return. In fact, more than 50 of the rolling 20-year periods resulted in an annualized total return of at least 9%.

Patient investors weren't simply scraping by with minimal gains if they happened to buy near a top. In virtually all instances, they've been generating annualized total returns that handily outpace the U.S. inflation rate and result in meaningful real-money returns.

Wall Street's most important investment chart has one simple lesson to teach: patience pays.