A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (2024)

There has seldom been a worse time to invest money in the stock market for the long term, according to Jon Wolfenbarger.

That's because valuations are historically elevated today, and over the period of around a decade, they carry significant weight in determining return outcomes. According to Bank of America, valuation levels explain 80% of the market's return over a 10-year period.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (1)

Bank of America

There are many ways to measure valuation levels in the overall market. Wolfenbarger, the founder of investing newsletter BullAndBearProfits.com and a former investment banker at JPMorgan and Merrill Lynch, cites John Hussman's ratio of the market cap of all non-financial stocks to the gross value added of those stocks. Hussman says it's the most accurate indicator of future market returns that he's found.

Right now, the metric shows -5% returns annually over the next 12 years. In the chart below, the valuation measure is shown in blue and is inverted, and actual subsequent S&P 500 returns are shown in red.

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A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (2)

Hussman Funds

Other valuation measures are also hovering at historically high levels. The so-called Warren Buffett indicator of total market cap-to-GDP well exceeds dot-com bubble levels and is reapproaching its 2022 highs. And, the Shiller cyclically-adjusted price-to-earnings ratio is above 1929 levels and trails levels only seen in 1999 and 2021.

Based on historical long-term returns when valuations are this high, Wolfenbarger said that the S&P 500 is likely to suffer a long and drawn-out sell-off. By the bottom of the market cycle, the index will have likely fallen 50%-70%, he said.

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While it sounds like a doomsday call, it's important to remember that these kinds of scenarios have in fact played out in recent decades. Stocks took two years to bottom when they crashed almost 50% after the dot-com bubble. They took a year-and-a-half from peak-to-trough in the Great Financial Crisis. And nine years following the dot-com bubble peak in 2000, the S&P 500 was still down about 50%.

Why will stocks crash?

Valuations by themselves aren't typically a good enough catalyst for a stock-market sell-off. Another look at the Bank of America chart above shows they matter very little in the short term.

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A sufficient catalyst, Woflenbarger said, is weakening in the labor market and a subsequent recession, which he believes is about to unfold.

Wolfenbarger shared with Business Insider multiple indicators he's watching that show the unemployment rate could rise in the months ahead.

The first is the National Federation of Independent Business' hiring plans index. Its three-month moving average has surged, indicating the unemployment rate could soon follow.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (3)

Trahan Macro Research

Second, The Conference Board's Employment Trends Index (in blue) has declined in recent years. Historically, this has meant trouble for total non-farm employment in the US, which has not yet unfolded.

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A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (4)

The Conference Board

Third, the number of US states with a rising unemployment rate is spiking, meaning that the overall unemployment rate should see further upside.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (5)

Trahan Macro Research

And fourth, about five quarters after the US Treasury yield curve inverts (using the 10-year and 2-year durations), unemployment has historically started to tick up. April will mark the start of the sixth quarter since the yield curve officially inverted, which according to the indicator's founder, Cam Harvey, is when the curve stays inverted for a duration of three months.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (6)

BullAndBearProfits.com

The US unemployment rate is already on a slight uptrend, having climbed from 3.4% in April 2023 to 3.9% as of February. According to the Sahm Rule, named after former Fed economist Claudia Sahm, once the three-month moving average of the unemployment rate moves up by 0.5% from its low over the previous 12 months, the US economy is in a recession in real time. The indicator has a perfect track record of identifying downturns. Today, it sits at 0.27.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (7)

St. Louis Fed

Wolfenbarger's views in context

Wolfenbarger's stock market call is on the more extreme end of Wall Street outlooks. Fellow market bears Jeremy Grantham, John Hussman, and David Rosenberg have all stuck to their significant downside expectations. But most top strategists at major banks see limited downside from here, if any at all. Many, including Goldman Sachs' David Kostin and Bank of America's Savita Subramanian, have had to revise upward their 2024 targets already this year.

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Wolfenbarger's recession call is also out of consensus these days, with many bearish forecasters abandoning their downbeat outlooks. But many see slower growth and a softening labor market going forward, even if that doesn't mean an outright recession.

This week, Pantheon Macroeconomics Founder and Chief Economist Ian Shepherdson laid out several reasons he sees unemployment ticking up in the coming months.

For example, layoffs are rising, which is usually followed by rising unemployment claims.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (8)

Pantheon Macroeconomics

"For the first time in this cycle, an array of indicators point tentatively to a meaningful slowdown in economic growth, driven by the consumer, and a clear weakening in the labor market, as soon as the second quarter," Shepherdson said in a client note.

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For now, however, bad data simply hasn't shown up yet, and bulls have ridden the wave to all-time highs — a trend that could very well continue. Only time will tell how Wolfenbarger's forecasts hold up in the near- and long-terms.

A 32-year market vet warns the S&P 500 is set to fall 50%-70% in the years ahead with valuations at historic highs — and says that an imminently weakening labor market will be the catalyst for the crash (2024)

FAQs

What stock market crash expert warns of 50 70 downside for the S&P 500? ›

This suggests the S&P 500 will average negative yearly returns over the next 12 years, Hussman has warned, and implies that the market would have to drop significantly to get back to levels where one could expect 10% annualized returns over the following 12 years.

What is the average growth rate of the S&P 500 in 30 years? ›

Looking at the S&P 500 for the years 1993 to mid-2023, the average stock market return for the last 30 years is 9.90% (7.22% when adjusted for inflation).

What is the average return of the S&P 500 over the last 70 years? ›

Stock market returns since 1970

This is a return on investment of 27,269.78%, or 10.86% per year. This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 3,276.19% cumulatively, or 6.68% per year.

How much does the S&P fall during a recession? ›

In almost every case, the S&P 500 has bottomed out roughly four months before the end of a recession. The index typically hits a high seven months before the start of a recession. During the last four recessions since 1990, the S&P 500 declined an average of 8.8%, according to data from CFRA Research.

Is S&P 500 high or low risk? ›

Disadvantages of Investing in the S&P 500

The index has risks inherent in equity investing: The S&P 500 has risks inherent in equity investing, such as volatility and downside risk. Newer investors may find it difficult to tolerate such volatility.

What was the worst period S&P 500? ›

December 31, 2008: For the year, S&P 500 falls 38.49 percent, its worst yearly percentage loss.

What is the average growth of the S&P 500 last 50 years? ›

The average yearly return of the S&P 500 is 11.47% over the last 50 years, as of the end of May 2024. This assumes dividends are reinvested. Adjusted for inflation, the 50-year average stock market return (including dividends) is 7.39%.

What is the S&P 500 10 year average? ›

The S&P 500 average return over the past decade has come in at around 10.2%, just under the long-term historic average of 10.7% since the benchmark index was introduced 65 years ago.

Is the S&P 500 good for long term growth? ›

The S&P 500 Index is considered a gauge of the U.S. economy. It is a broad-based measure of large corporations traded on U.S. stock markets. Passively holding the index over longer periods of time often produces better results than actively trading or picking single stocks.

Is now a good time to invest in the S&P 500? ›

Also, research suggests that when it comes to the S&P 500's historical returns, there's never been a bad time to buy as long as you're a long-term investor.

How long did it take for the S&P 500 to recover from 2008? ›

In the most extreme drop, it took 8 years for S&P 500 prices to recover after the dot-com bubble burst in 2000, which was immediately followed by the crash of 2008. Following that crash, it took about 6 years for prices to recover to their previous all-time highs.

What was the worst market crash in history? ›

The fastest market crash in history came on Oct. 19, 1987. The S&P 500 and Dow Jones Industrial Average each plunged more than 20% in a single day, the biggest single-day percentage decline in history.

What is the most spy has dropped in a day? ›

Using the 12 largest single-day down moves over the last 3 years in SPY stock, the average move was -3.4% with the single largest daily move of -4.3% occurring on 13-Sep-2022. The following day, SPY stock price averaged -0.3% losses, with up moves and down moves occurring equally.

What is the most the S&P 500 has fallen in a day? ›

The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent. Two of the four largest percentage declines for the Dow occurred on consecutive days — Oct. 28 and 29 in 1929.

What is the safest investment if the stock market crashes? ›

Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.

Is the stock market crash coming in 2024? ›

While many experts are making predictions about whether the market will crash in 2024 or how severe the next downturn will be, it's impossible to say with certainty where stock prices will be in the short term. However, the market's long-term performance is all but guaranteed to be positive.

What is the best protection against stock market crash? ›

Diversification into non-equity-based assets, such as bonds, property and commodities, can also protect your portfolio in the event of a stock market crash. It's important to pick assets that aren't correlated, in other words, their price movements do not move up and down together, but rise and fall at different times.

What were the worst stock market crashes? ›

Some of the most significant stock market crashes in U.S. history include the crash in 1929 that preceded the Great Depression, the crash in 1987, known as Black Monday, the dotcom bubble crash in 2001, the 2008 crash related to the Financial Crisis, and the 2020 crash following the outbreak of COVID.

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