Is Wall Street's 2026 Stock Market the Most Dangerous in 155 Years? Here's Why You Could Lose Everything!

If things seem too good to be true on Wall Street, history shows they probably are. For the better part of the last 16 years, the U.S. stock market has been nearly unstoppable. Outside of the COVID-19 crash, which lasted just five weeks, and the bear market of 2022 that endured about nine months, investors have enjoyed extended periods of growth. In 2023, the broad-based S&P 500 (^GSPC), growth-driven Nasdaq Composite (^IXIC), and iconic Dow Jones Industrial Average (^DJI) have all rallied to several record highs. These substantial gains have been spurred by the evolution of artificial intelligence, predictions of future interest rate cuts by the Federal Reserve—lower rates can reduce borrowing costs for businesses, potentially leading to increased hiring, innovation, and merger activity—and better-than-expected corporate earnings.

Despite the apparent bullish momentum, history offers contrasting lessons. Although stocks have delivered the highest average annual return of any asset class over the last century, these returns come with significant volatility. As the major stock indices have climbed to unprecedented levels, stock valuations are also reaching new heights.

The Stock Market's Pricey Landscape

Wall Street seems poised to enter 2024 with the second priciest stock market on record, and history serves as a cautionary tale for investors. It's crucial to note that no single data point or indicator can precisely predict the future performance of individual stocks or indices. However, patterns from history have shown remarkable consistency in forecasting the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average's future performance.

Valuation is a subjective matter; what one investor sees as overpriced, another may view as a bargain. Yet, there exists a more objective valuation measure: the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the cyclically adjusted P/E Ratio (CAPE Ratio). This metric is particularly valuable because it is based on average inflation-adjusted earnings over the previous decade. This makes it more resilient during economic downturns compared to the traditional P/E ratio, which relies on trailing 12-month earnings per share.

The Shiller P/E has been back-tested to January 1871, revealing an average multiple of 17.31. However, the S&P 500's Shiller P/E has frequently exceeded this average over the last 30 years, primarily due to the proliferation of the internet, which has diminished information barriers between Wall Street and Main Street, and the historically low interest rates that have encouraged investment in growth stocks. As of November 26, 2023, the S&P 500's Shiller P/E stood at 40.20, nearing the late October peak of 41.20 for the current bull market. Notably, this marks only the third time since 1871 that the Shiller P/E has surpassed 40, with previous peaks recorded at 44.19 in December 1999 and just above 40 before the onset of the 2022 bear market.

History indicates a pattern: following the last five instances where the Shiller P/E exceeded 30, major stock indices like the S&P 500 and Nasdaq Composite have experienced declines ranging from 20% to 89%. While the 89% drop is an outlier observed during the Great Depression, the S&P 500 and Nasdaq plummeted 49% and 78%, respectively, after the burst of the dot-com bubble.

Thus, when examining the current stock market landscape, it appears not a matter of "if," but rather "when" a significant downturn will occur.

Bear Markets: Opportunities in Adversity

Most investors are understandably wary of the prospect of the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average losing 20% or more of their value, especially given the emotional responses that often accompany such declines. Yet, bear markets and crashes can present generational buying opportunities for those with a long-term investment strategy.

As noted earlier, navigating Wall Street is seldom a straightforward journey. Stock market corrections and bear markets are normal, healthy, and inevitable features of the investing cycle, one that no action by the Federal Reserve or U.S. government can entirely prevent. Research from Bespoke Investment Group illustrates this disparity: since the Great Depression, the average length of an S&P 500 bear market has lasted approximately 286 calendar days, compared to a typical bull market that has persisted for around 1,011 calendar days—about 3.5 times longer.

While it's impossible to pinpoint when a downturn will commence, how long it will last, or where the bottom will be, history demonstrates the advantage of seizing opportunities during substantial declines. The stock market's cyclical nature means that patience can often yield significant rewards for long-term investors who are willing to weather the storm.