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The S&P 500 Just Completed a Feat So Rare It Was Last Witnessed During the Great Depression -- and It Has a 100% Success Rate of Forecasting Where Stocks Go Next
When Wall Street volatility picks up, investors often turn to correlative data points and events for clues as to which direction the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite will head next.
An event that's occurred just five times in 98 years for the S&P 500 points to a very clear directional move for the broad-based index.
Time is an ally that has consistently rewarded patient investors.
Over extended periods, no other asset class has come particularly close to matching the annualized return potential of stocks. But when the timeline is narrowed to days, months, or even the span of a few years, you'll find that stocks move from point A to point B in anything but a straight line.
Following more than two years of unbridled optimism on Wall Street, the iconic Dow Jones Industrial Average(DJINDICES: ^DJI), broad-based S&P 500(SNPINDEX: ^GSPC), and growth stock-dominated Nasdaq Composite(NASDAQINDEX: ^IXIC) have hit a rough patch. Since the S&P 500 peaked on Feb. 19, the Dow Jones and S&P 500 have fallen into correction territory, with the typically more volatile Nasdaq Composite dipping into an official bear market (its first in three years).
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Moreover, investors have borne witness to historic bouts of volatility. In April, the S&P 500 navigated its way through its fifth-worst two-day decline on a percentage basis (-10.5%) in 75 years and enjoyed its largest single-session nominal point increase since its inception. The Dow and Nasdaq also recorded their largest single-day point gains in their storied histories.
Image source: Getty Images.
When the stock market vacillates wildly, it's perfectly normal for investors to seek out data points and events that have historically correlated with big moves higher or lower in one or more of Wall Street's major stock indexes. Even though no correlative metric or event can guarantee what the future holds, strong correlations may offer investors an edge.
Last week, the benchmark S&P 500 completed a feat so rare -- only the fifth occurrence in 98 years -- that the last time it was observed was during the Great Depression. More importantly, this event has a knack for predicting what comes next for stocks.
This was last observed during the tail-end of the Great Depression
Wall Street's outsized volatility over the last five weeks is a function of fear and uncertainty on the part of investors. This has been driven by a combination of factors, which absolutely includes President Donald Trump's tariff policy.
Following the close of trading on April 2, President Trump unveiled a 10% global tariff and higher "reciprocal tariff rates" on select countries that have traditionally run trade deficits with America. This announcement is what kicked off the S&P 500's double-digit two-day tumble. But it should be noted that the president paused these reciprocal tariffs on all countries, save China, for 90 days on April 9. This sparked the aforementioned historic single-session rallies in the Dow, S&P 500, and Nasdaq.
While tariffs might sound cut and dried on paper, they're anything but straightforward in the real world. Their usage can harm trade relations, reignite the prevailing inflation rate, and slow or halt economic growth.
Additionally, the stock market entered 2025 at its third-priciest valuation when back-tested over more than 150 years, based on the S&P 500's Shiller price-to-earnings (P/E) ratio. Historically, Shiller P/E ratios above 30 have been precursors to significant downside in one or more of Wall Street's major stock indexes.
But when discussing history, few things are as rare as the S&P 500's about-face in April.
According to data aggregated on social media platform X by Subu Trade, a self-proclaimed "multi-strategy macro trader" who's a big fan of historic correlations, the S&P 500 was down more than 10% at one point during April (from where it ended March) but ended the month with a loss of less than 2%. This is only the fifth time since 1927 -- and the first since the Great Depression -- that the S&P 500 lost more than 10% on an intramonth basis and effectively recovered most of its decline.
On the surface, the S&P 500's recovery of most of its losses would seem to be an optimistic development. Yet, as history has shown, the immediate future for stocks has been murky following previous occurrences.
The four prior instances where the benchmark index fell at least 10% intramonth and recovered to close down 2% (or better) from the previous month resulted in negative returns one year later 100% of the time. On average, the broad-based index has shed 15.3% of its value 12 months after this rare feat occurs.
To add some context here, the Great Depression was an unprecedented period for the U.S. economy and stock market. In the roughly nine decades since it occurred, the Federal Reserve and federal government have learned a lot and have much better tools to combat protracted downturns. This makes a depression in modern times unlikely.
Nevertheless, history has a knack for rhyming on Wall Street, and this unique feat by the S&P 500 intimates that the index will be lower one year from now.
Image source: Getty Images.
Patience pays off handsomely on Wall Street
Most investors aren't fans of the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite being whipsawed violently, and they're probably not going to appreciate the correlation derived from the S&P 500's April about-face. But if there's one correlation that's worked with an exceptionally high probability of success for investors, it's the power of time as an ally.
No amount of well-wishing from investors or fiscal/monetary policy actions can prevent stock market corrections, bear markets, and even the occasional crash from taking shape on Wall Street. Downturns are a perfectly normal, healthy, and inevitable aspect of putting your money to work in the greatest wealth creator on the planet.
But what's interesting is that downturns can often be the ideal time to put your money to work. When excessive downside volatility has previously struck the S&P 500, return data shows the index moves higher at an outsized pace to its historic average five years later.
Perhaps even more impressive is the benchmark index's performance over the ultra-long term.
^SPX data by YCharts. The above S&P 500 chart goes back only to 1950.
Every year, the analysts at Crestmont Research refresh a published data set that examines the rolling 20-year total returns, including dividends paid, of the S&P 500 dating back to the start of the 20th century. Even though the S&P didn't officially exist until 1923, researchers were able to track the total return of its components in other major indexes from 1900 to 1923.
Crestmont's data set yielded 106 rolling 20-year periods (1900-1919, 1901-1920, 1902-1921, and so on, to 2005-2024) of which all 106 produced a positive annualized total return. In other words, if an investor hypothetically purchased an S&P 500 tracking index at any point between 1900 and 2005 and held their position for 20 years, they made money every time.
Regardless of what near-term volatility and tariff-related uncertainty may bring, patience has been rewarding investors handsomely on Wall Street for more than a century -- and that's not going to change.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
