As of the closing bell on Nov. 13, the S&P 500’s Shiller P/E clocked in at 38.18, more than double its average reading of 17.17 when back-tested to January 1871.

But more importantly, the Shiller P/E ratio has reached a reading of 38 only three times during a bull market rally in 153 years. In December 1999, during the dot-com boom, the Shiller P/E peaked at a reading of 44.19. Meanwhile, in the first week of 2022, it very briefly lifted above 40.

What’s noteworthy is what’s happened to Wall Street’s major stock indexes following these prior periods when valuations became very clearly overextended to the upside. The dot-com bubble resulted in a peak-to-trough drop of 49% in the S&P 500 and a considerably steeper decline in the Nasdaq Composite. Meanwhile, the Dow Jones, S&P 500, and Nasdaq Composite entered respective bear markets in 2022.

Stepping back even further, there have been only six instances since 1871 when the Shiller P/E surpassed 30, including the present. Following each of the five prior occurrences, the Dow, S&P 500, and/or Nasdaq Composite eventually fell between 20% and 89%.

Although the Shiller P/E tells us nothing about when stock market corrections/bear markets might occur, thus far, it has a flawless track record of foreshadowing major moves lower in the stock market.

Based on what history tells us, at some point in the not-too-distant future, we’re going to see a pretty sizable move lower in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. But if you’re a long-term investor looking to the horizon, history has a message for you, as well: Perspective changes everything.

Over shorter time frames, predicting what the U.S. economy or stock market will do can be tricky, if not downright impossible. For example, recessions are a normal and inevitable part of the economic cycle. No matter how much we cross our fingers and think good thoughts, economic contractions are eventually going to occur.

But here’s the thing about recessions: They’re short-lived. If you take a step back and look at the bigger picture, you’ll see that nine out of 12 recessions following World War II resolved in less than a year, while the remaining three failed to surpass 18 months in length.

On the other end of the spectrum, two economic expansions have reached the 10-year mark since World War II ended. The point being that the U.S. economy spends considerably more time in the sun than navigating through a storm — but you have to take a step back to see this dynamic play out.

The same holds true on Wall Street.

The data set you see above was posted on social media platform X in June 2023 by the researchers at Bespoke Investment Group. It shows the calendar-day length of every bear and bull market in the benchmark S&P 500 dating back to the start of the Great Depression in September 1929.

As you’ll note from the table, the average S&P 500 bear market decline is only 286 calendar days, roughly 9.5 months. This is consistent with downturns in the U.S. economy resolving quickly.

On the other hand, the average S&P 500 bull market over 94 years has endured for 1,011 calendar days, which equates to around two years and nine months. Including the current bull market rally, just over half (14 out of 27) of all bull markets for the S&P 500 have lasted longer than the lengthiest bear market.

Even though stock market downturns are normal and inevitable, perspective demonstrates just how powerful patience can be for long-term investors.

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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.

The Stock Market Is Doing Something Witnessed Only 3 Times in 153 Years — and History Is Very Clear What Happens Next was originally published by The Motley Fool