Monday’s late-day selloff left many investors pale, as the Dow suffered another triple-digit loss while the S&P 500 suffered its worst three-day drop since 2011.
Chalk it up to a blitz of bad news — including troubles in the Middle East, the Ebola outbreak, and fears about slowing global growth, particularly in Europe.
But it’s important to put matters in proper perspective.
The major stock market indexes have sunk in recent days, but not by a huge amount.
Some stocks have been hit harder — for instance airlines, thanks to fears over the economy and Ebola…
… and small-company shares, which are more volatile to begin with.
Still, even with the sell-off, the S&P 500 has gained slightly more over the past 12 months than its historic annual average of 10.1%.
And while investors are more frightened than before, as measured by the so-called VIX “fear index”…
… the recent spike in the VIX pales in comparison to investor anxiety in 2011…
… or in the financial crisis.
There is one thing investors should worry about — and that’s market valuations.
The so-called Shiller price/earnings ratio, which compares stock prices to the past 10 years of average corporate profits, is as high as it was heading into the financial crisis. And history shows that when the Shiller P/E, popularized by Nobel Prize winning economist Robert Shiller, is this far above the historic average of around 16, future stock market returns tend to be muted.
Will that be the case this time? Only time will tell.