The S&P 500 Just Did Something That’s Historically Resulted in the Benchmark Index Doubling Over 5 Years
Making history is nothing unusual for Wall Street’s benchmark indexes. As of the closing bell on April 17, the S&P 500(SNPINDEX: ^GSPC) and Nasdaq Composite(NASDAQINDEX: ^IXIC) were both at record highs, while the Dow Jones Industrial Average(DJINDICES: ^DJI) was one solid day away from joining its peers. The Nasdaq was also on a 13-day winning streak — its longest of the 21st century.
While there is no shortage of reasons for stocks to stumble, the benchmark S&P 500 just offered a historically charged reason for optimists to be excited about the future.
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On Feb. 28, U.S. forces, along with Israel, commenced military operations against Iran, leading the latter to close the Strait of Hormuz to commercial vessels. This closure disrupted approximately 20 million barrels of liquid petroleum daily (roughly 20% of global demand) and sent Wall Street into a tizzy.
In the weeks following the start of the Iran war, crude oil and energy prices surged, leading to a rapid increase in trailing 12-month U.S. inflation. The uncertainties about how long the Iran war would last and how much of an impact skyrocketing energy prices would have on inflation sent the Dow and Nasdaq Composite into correction territory.
It also sent the CBOE Volatility Index(VOLATILITYINDICES: ^VIX) soaring. The “VIX,” as it’s more commonly known, measures the implied 30-day volatility of S&P 500 option contracts. The higher the VIX, the more investor fear and uncertainty that’s being priced into the S&P 500.
Between Feb. 27 and March 27, the VIX jumped from sub-20 to 31.05. But over the previous three weeks, ending April 17, the VIX has collapsed by roughly 44% to 17.48.
According to Creative Planning’s Chief Market Strategist, Charlie Bilello, this is the 20th time the CBOE Volatility Index has “crashed” by at least 34.7% over three weeks since 1990. This latest volatility crash is the fifth-largest of the 20.
While volatility crashes often accompany significant short-term bounces in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, they also pave the way for outsize future returns, based on what history tells us.
On average, the benchmark S&P 500 is higher by 19.9%, including dividends, one year after a major three-week volatility crash. For context, the S&P 500 has gained closer to 10% annually on a total return basis since its inception.
The S&P 500’s performance becomes even more promising the further investors look beyond a three-week volatility crash. The average five-year total return is 100.1%! Furthermore, for all qualifying events, the S&P 500 was higher two, three, four, and five years after every three-week volatility crash.
Although periods of heightened volatility and uncertainty tend to scare investors and tug on their heartstrings, history shows that there arguably isn’t a better time to put capital to work on Wall Street. While the stock market’s headwinds are unlikely to dissipate anytime soon, 36 years of data suggest the good times will continue to roll for the Dow, S&P 500, and Nasdaq Composite.
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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.
