We’re seeing the investing adage “stocks climb a wall of worry” play out before our eyes. The S&P 500 (SNPINDEX: ^GSPC) is near its all-time high. However, consumer sentiment is near a record low. Inflation is rising. The odds are high that the Fed will be forced to raise rates over the next few months.
Is it really safe to invest in the S&P 500 right now? History offers a clear answer.
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Warning signs from the past
The S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio is one of the best market valuation metrics. This ratio currently stands at 41.4, according to YCharts. The last time the S&P 500 Shiller CAPE ratio was higher was in 2000.
Investors who know their history probably remember what happened 26 years ago. The dot-com bubble burst, with the S&P 500 eventually sinking by nearly 50%.
Economist and Nobel laureate Robert Shiller, who designed the CAPE ratio, analyzed historical stock market data. He found that every time the CAPE has topped 30, real returns over the next 10 years have been below the historical average.
There’s also another valuation yellow flag waving that investors shouldn’t ignore. Warren Buffett popularized a metric that was eventually called “the Buffett indicator.” This metric measures the ratio of total stock market capitalization to U.S. GDP.
Buffett stated in 2001 that anytime the ratio approaches 200%, investors are “playing with fire.” He has been proven right in the past. The Buffett indicator rose nearly that high in 1999 and early 2000 — and the stock market soon tanked. It topped 190% in late 2021. The S&P 500 fell 19% the next year.
Where does the Buffett indicator stand today? At 232% — its all-time high. If Buffett is still right, investors are playing with fire yet again.
A rosier, longer-term lesson
However, history provides a rosier lesson over the longer term. The S&P 500 has generated a positive return 94% of the time over any 10 years. And over 20-year periods, the index has always delivered positive returns.
Suppose you invested $10,000 in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) at the market peak on March 24, 2000. Horrible timing, right? The market plunged shortly afterward. If you sold in a panic, you would have lost a lot of money.
