Patience has paid off handsomely for investors since the coronavirus pandemic began. Despite the benchmark S&P 500 (SNPINDEX:^GSPC) losing a third of its value in roughly a month during the first quarter of 2020, the index has since more than doubled.
However, double-digit corrections and stock market crashes are a normal part of the investing cycle. Given a number of variables, there looks to be a growing likelihood of downside in the S&P 500.
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All signs point to a growing possibility of downside in the broader market
As an example, margin debt hit an all-time high earlier this year and jumped by more than 60% from the prior-year period. Margin debt describes the amount of money borrowed with interest to buy or short-sell securities. Since 1995, there have only been two other instances where margin debt outstanding rose by at least 60% in a given year: Right before the dot-com bubble burst and months before the financial crisis began.
Beyond just margin debt, there are valuation concerns. Admittedly, the advent of the internet and the democratization of online trading with the removal of commission fees has helped expand earnings multiple over the past quarter of a century. However, this doesn’t negate that the S&P 500’s Shiller price-to-earnings (P/E) ratio is in rarified territory.
This past week, the Shiller P/E, which examines inflation-adjusted earnings over the last 10 years, closed above 40 for the first time in almost two decades. Aside from being well over double the 151-year average, there’s the precedent that the S&P 500 lost at least 20% of its value following the previous four instances of the Shiller P/E crossing above 30.
Even history suggests the market will head lower. Following each of the previous eight bear-market bottoms, dating back to 1960, the S&P 500 has endured one or two declines of at least 10% within 36 months. What this tells investors is that rebounding from a bear market is a process that often has many bumps in the road. Thus far, the bounce back from the pandemic bottom has been a virtual straight shot higher.
All signs would appear to point to an upcoming stock market crash or sizable correction.
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Crashes and corrections are the perfect time to buy dividend stocks
On the flipside, crashes and corrections have always represented an opportunity for long-term investors to go shopping for great companies at a discount. After all, every crash or correction throughout history has eventually been put in the rearview mirror by a bull-market rally.
Perhaps the smartest pathway to riches during a crash or sizable correction is to buy dividend stocks. Companies that parse out a regular dividend are often profitable and time-tested, which makes them perfectly suited to help you navigate short-term stock market downside.
If a crash or steep correction does materialize, the following three unstoppable dividend stocks would…
Read More: 3 Unstoppable Dividend Stocks to Buy If There’s a Stock Market Crash