Sean Williams, The Motley Fool
8 min read
In This Article:
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When the stock market gyrates, investors often dig for clues as to which direction the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite will head next.
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A comprehensive valuation-based forecasting tool that's been back-tested 154 years points to eventual trouble for Wall Street's major stock indexes.
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Thankfully, history disproportionately favors long-term, optimistic investors.
Investors have no shortage of ways to grow their wealth over time. They can buy real estate, put their money to work in fixed-income assets like certificates of deposit or U.S. Treasury bonds, and can purchase commodities like oil, gold, and silver. However, no other asset class has come within a stone's throw of stocks over the last century on an annualized return basis.
But just because stocks are the premier asset class to own over multiple decades, it doesn't mean Wall Street's major indexes move up in a straight line.
The iconic Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and growth-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC), have endured their fair share of corrections, bear markets, and even crashes since their respective inceptions. In just a one-week period in early April, we observed the fifth-largest two-day percentage drop for the S&P 500 dating back to 1950, as well as the largest single-day nominal point gain for the Dow Jones, S&P 500, and Nasdaq Composite since their respective inceptions.
When the market gyrates, it's perfectly normal for investors to dig for clues as to which direction stocks will move next. Even though no metric or predictive tool can guarantee what's to come, it's hard to overlook the statistical correlations that some data points and events have offered over the years.
One forecasting tool, which occurs infrequently but has a historically flawless track record of correlating with big moves on Wall Street, has a crystal-clear message for investors: Prepare for eventual downside.
To preface the following discussion, there's always a data point, correlative event, or X factor threatening to cause the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to plunge. Despite this, these indexes have motored higher over longer periods.
But based on one value-focused forecasting measure, the good times are, eventually, set to end for Wall Street's major stock indexes.
