Last year was one of the worst for the S&P 500 index, which is considered the benchmark that best represents the state of the overall market. It is also the benchmark that is used by many exchange-traded funds (ETFs), like the first and largest ETF, the SPDR S&P 500 ETF (SPY -0.56%).
The S&P 500 finished the year down 19.4%, which is just shy of bear market territory. But it did spend several weeks actually in bear market territory, down as much as 24% in October of last year. It was the worst year for the index since the market crash of 2008.
2023 has started out a little better for the S&P 500, with it notching a 7% gain as of Feb. 7. But is the worst over, and is it safe to invest in the index right now?
The S&P 500 has returned nearly 10% annually historically
The most important thing to know about the S&P 500 is that, over time, it has returned about 10% annually on a total return basis since its modern configuration in 1957. The gray lines in the chart below indicate recessions, so you can see there have been more than 10 over that period.
^SPX data by YCharts
The index actually goes back even farther to 1928, but it didn't have 500 stocks in those days. But even stretching back that far, which includes the Depression, the annual total return, with reinvested dividends, has been about 9.8%.
So, the volatility we saw last year, and may see again this year, is nothing to be too concerned about, as the index has generated solid returns over time. In fact, for every bear market and correction, there have been more -- and longer -- bull markets. A recent analysis by Hartford Funds showed that while the average bear market lasts around 289 days, the average bull market last about 991 days -- almost three years. It also revealed that stocks lost about 36% on average in the typical bear market but gained 114% in the average bear market.
Image source: Getty Images.
In addition, their research shows that roughly 34% of the stock market's best days came within the first two months of a bull market. Of course, it is impossible to know at the time when a bull market starts -- we may even be at the beginning of one now -- so it is important to remain invested.
The time is right
One metric to keep an eye on with respect to the S&P 500 is the price-to-earnings (P/E) ratio. The average P/E ratio for the S&P 500 since 1980 is about 21. Right now, the P/E ratio of the S&P 500 is about 22, which is at the high end of its historic range. It has gradually declined from a high of 38 at the start of 2021.
But the cyclically adjusted P/E ratio, also known as the Shiller P/E ratio, is still a bit high at 30. This is often considered a more accurate gauge as it is based on an inflation-adjusted 10-year earnings snapshot, which serves to limit the impact of short-term volatility. It has come down from a high of 38 at the end of 2021, but its range throughout much of the 2000s and 2010s was generally between 20 and 28, so it may indicate that the S&P 500 is still overvalued.
Thus, an overvalued S&P 500 is often an indicator that we could still see a drop in 2023. Maybe not a bear market, which is a 20% fall, but perhaps something in correction territory, which is a 10% or more decline.
All that said, the S&P 500 has been the smartest investment one can make over the past 65 years, so it really is never a bad time to invest in the S&P 500. While we could still see it decline this year, the gains, as they have done historically, should more than outweigh the losses.
Dave Kovaleski 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.
FAQs
Defying expectations, the S&P 500 gained 26.3% in 2023, reversing its 2022 decline. In a year full of tribulations, key factors such as tech stocks running up and US inflation cooling contributed to US equities resilience.
Is the S and P 500 still safe? ›
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Is it a good time to buy S&P 500? ›
We're only a few months into 2024, but the S&P 500 (SNPINDEX: ^GSPC) has started off the year with a bang. The index is currently up by more than 8% this year alone and it's soared by a whopping 44% from its lowest point in October 2022.
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How high will the S&P 500 go in 2024? ›
The estimates from strategists put the median target for the S&P 500 at 5,200 by the end of 2024, implying a decline of less than 1% from Friday's level, according to MarketWatch calculations. Heading into 2024, the median target was around 5,000 (see table below).
Why not just invest in S&P 500? ›
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
What if I invested $1000 in S&P 500 10 years ago? ›
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
How much would $1000 invested in the S&P 500 in 1980 be worth today? ›
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
Is S&P 500 still a good investment 2024? ›
The S&P 500 has risen sharply in recent months, partly fueled by the view the Fed could soon start cutting rates. The index has hit record highs this year, and is up about 4% so far for 2024 after rising 24% in 2023.
What will 100k be worth in 20 years? ›
How much will $100k be worth in 20 years? If you invest $100,000 at an annual interest rate of 6%, at the end of 20 years, your initial investment will amount to a total of $320,714, putting your interest earned over the two decades at $220,714.
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
What is the best month for the S&P 500? ›
During the last three decades, April has not only been one of the most consistently positive months of the year, but also one of the best-performing months of the year where the S&P 500 is concerned. The chart below shows the index's average return in each month since 1994.
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Investors have plenty to cheer as 2023 draws to a close, with the S&P 500 ending the year with a gain of more than 24% and the Dow finishing near a record high. Easing inflation, a resilient economy and the prospect of lower interest rates buoyed investors, particularly in the last two months of the year.
How much will the S&P 500 gain in 2023? ›
2023 was supposed to be a tough year for stocks. However, consumers shrugged off higher interest rates, and investors were more optimistic than fearful largely due to exuberance around AI. As a result, the S&P 500 rallied over 24% in 2023.
How will the S&P 500 perform in 2023? ›
The S&P 500 is up about 24% in 2023, a stunning bounce back from last year—the index's worst performance since the 2008 financial crisis.
What is the sp500 projected to be in 2023? ›
Analysts expect the S&P 500 will report single-digit revenue growth in CY 2023. The estimated (year-over-year) revenue growth rate for CY 2023 is 2.3%, which is below the trailing 10-year average (annual) revenue growth rate of 5.5% (2013 – 2022).
