Why Picking the Market’s Peak Is Like Guessing Future Weather
Ever caught a friend bragging, “I know when the market tops out!”? Turns out, most investors fall into that same trap. They’re convinced crypto‑savvy intuition can spot the apex of the stock market, but getting that right is more elusive than a squirrel on a yoga mat.
Ben Carlson’s 2017 Reality Check
Financial journalist Ben Carlson dropped a 2017 Bloomberg article that had us reevaluating our brewing assumptions. He set the stage by noting the exact numbers that rolled into each of the 15 bear markets in U.S. stocks since WWII. Think of it as a cheat sheet for chaos.
- Valuation gauges – Trailing P/E, cyclically adjusted P/E (CAPE), dividend yield.
- Interest vibes – The 10‑year Treasury yield.
- Inflation clues – The year‑over‑year inflation rate.
These are the headline stats that the media loves to quote and most investors stare at like glowing streetlights. (CAPE, for the uninitiated, is a cool mash‑up of current price and the 10‑year average inflation‑adjusted earnings.)
Numbers: The Unbelievable Mess of Predicting Peaks
One might think that hot prices, soaring rates, and rampant inflation would scream “bear market incoming.” But the truth is messier than a toddler with crayons: bear markets have sparked whether those metrics were high or low. No single number paints the full picture.
A sidebar: don’t toss out valuations entirely. They’re still big players when we talk about long‑term returns. In fact, Robert Shiller’s historic data for the S&P 500 tells us that a cheap market tends to deliver higher 10‑year upside than a pricey one.
Shiller’s Data Doodles
The chart below (drawn from Shiller’s 1871‑2019 series) aligns 10‑year returns with the starting valuation. The trend? Lower valuations → higher historical returns. The lesson? Start cheap, finish grand.
Quick takeaway: Even though guesses about peaks will always be a guessing game, a solid foundation—pondering how cheap the market is—still gives a good sense of what long‑run gains look like.
When the S&P 500 Turns Into a Roller Coaster
Even after we crunch the numbers, the 10‑year return of the S&P 500 still feels like a thrilling cliff‑hanger for any given valuation level.
How It Looks Today
Right now the index’s cyclically‑adjusted P/E ratio is hovering around 31 – a bit above the “healthy” 30 mark.
What History Tells Us
When the CAPE ratio dips above 25, the 10‑year annual returns can vary wildly. Below is a quick snapshot of what those returns have looked like over the past years:
- Low‑End Results: Around 3%–5% per year – the not‑so‑exciting side of the story
- Mid‑Range Result: About 6%–8% per year – the average ride
- High‑End Gains: Up to 12%–15% per year – the moments that make investors jump for joy
So, as you can see, the S&P 500’s performance pages can be as unpredictable as a sitcom plot twist, especially when riding on a valuation beyond 25.
Keeping Your Cool During the Bear Market Roller Coaster
Ever wonder why the market seems to hit the brakes at the worst moments? Predicting a bear market is like asking a cat to tell the weather—almost impossible. But don’t quit your shoes for the slides. The secret is simple: stay invested.
Think about it: since World War II, the U.S. stock market has blasted up by 228,417% when you add dividends, spanning from 1945 to 2019. That’s about an 11% annual return on average.
What’s the trick?
- Flip the narrative—bear markets are costs for a long‑term payoff, not penalties from the universe.
- Stick around—the long road still pays off even when the short valleys feel like a bad dip at a playground.
Sure, the troughs sting when the anxiety spikes, but by seeing them as qualifying fees for future gains, you’ll feel less pressure and can ride the market waves like a seasoned surfer.
Heads up: this is plain info, not professional financial advice, but hey—knowledge is power. Keep investing!
