S&P 500

Hi guys just wanted to put things in perspective for you all since some of you seem to be quite nervous with the recent week of stock movement.

I've summarised a list all stock market crashes since 1950. There has been 7 stock market crashes since 1950, averaging one every 10 years.

The stock market crashes ranges from inflation (10%+), to oil price rises (4x) due to war, dot com bubble, housing market collapse, covid-19 etc.

The graph is a log graph meaning that the space changes are proportional to the percentage change. This is useful for looking at long term charts since the % change for a dollar increase is smaller as the index value goes up.

The S&P 500 has averaged a compound annual growth rate of 8.22% since 1950. This is illustrated by the trend lines, and as you can see the S&P 500 is trading right in the middle of the range (the two blue trend lines).

I noted a few reasons in the box for each crash for a brief understanding of why it had happened. Note, that the only one with a 'fear of overvaluation' was only the dotcom crash where the PE's were over 200 and many companies were just cash burning shells with massive negative free cash flows.

I'm not saying a crash / correction won't happen, but i just wanted to put things into perspective and give a bigger picture of the overall stock market since pretty much before all of us were born.

By no means am i an economist but I didn't include anything earlier than 1950s because that was pre WW2/WW1 - before the US was a superpower / the global financial hub / USD = world trade currency etc.

Edit: some of you noted that its only 8.22% if you bought at the start but I want to clarify that yes and no! Yes for the people that literally buy in once once at the beginning of 1950.

No because if you buy throughout the years (DCA every month let's say) you'll buy within the range - both lower and higher range! So it's more or less 8%! For example during 1960s-1980s the sp500 traded sideways! So if you constantly bought in those 20 years, the accumulation of money in this period would have a higher CAGR of > 8% because of where it is in the range. Just follow the lines! It makes it easier. There's roughly same amount of periods above and below the middle trend line.

Edit: Changed enron scandal to lehman brothers as some pointed out my mistake.

Edit: Further Log Graph explanation (why log is preferred) If the scale has a large range (i.e. 100 to 3000) then log should be used because its important to show the % changes as opposed to the point changes. A 1 point increase in the SP500 now is only 1/3811 = 0.02% whereas a 1 point increase 10 years ago was 1/1000= 0.1%. It's important to look at it in terms of % change because companies grow in terms of % as well. For example you don't quote apple has grown its business by 30 billion this year ( random number), instead you say apple grew its sales by 20% this year. Its so that its comparable.

The current S&P 500 price-to-sales ratio is 2.84. I have performed an analysis of S&P 500 performance in relation to the index's price-to-sales ratio since 1928, and here is what I have found (all returns are with dividends reinvested):

1. When P/S ratio is <0.5, the annualized return over the subsequent 5 years is 12.1% yearly

2. P/S 0.5 to 0.8: 10.2% yearly return over 5 years

3. P/S 0.8 to 1.2: 8.8% yearly return over 5 years

4. P/S 1.2 to 2: 5.5% yearly return over 5 years

5. P/S 2 to 2.5: 4.4% yearly return over 5 years

6. P/S>2.5: we have no idea what the returns over 5 years are, because we are currently in the first period in 100 years where the P/S is > 2.5

Do with this information what you would like. Personally, I am holding what I own, but no longer buying. I have no idea when the drop will come, but the S&P will have to revert, at some point, towards its historical average P/S ratio of 1.71. That's 39.8% lower than it is currently. Either we get a massive increase in revenues, or the market has to drop.

Hello! I wanted to start investing as I am a sophomore in college I don’t have too much extra money but do want to invest still for my future.

Is $50 a month an okay start to invest?

The S&P 500, currently at 3800, has a P/E ratio of around 19 and a half, down from the 30+ it was last year. If we revert to the mean of 15 in terms of PE, we’re looking at a 25% drop from here which takes us to 2850. The scenario of complete reversion to the mean is tied to a 30 year treasury yield reverting to its long term average of 6.29%, which seems unlikely unless inflation expectations really get out of control in the next years. So let’s say this is the worst case scenario.

Then we have earnings contraction, latest estimates by Goldman are around 11% in the next 2 years. That would take us from 2850 to 2536.

Would you consider 2500 a good approximation for a worst case scenario, in which earnings come down and inflation is not tamed?

I am wondering when to enter this market in a major way, and 3200 seems like a good point to start averaging down. In my mind, if the worst case is to 2500, it is a 22% decline from 3200, very bearable psichologically. My investment time horizon is 20+ years, so not too worried about the incoming recession. Not trying to pick the bottom, just curious about how bad things can get.

Do Bull Traps in the past go up that much? Genuine question? I've been bearish, but this rally is starting to break my belief, at this rate we'll be at ATH by June lol.