The U.S. Stock Market is Down 13.7%—Is It Still Too Early to Buy the Dip?

YTD the US S&P 500 Index (known to track the overall US market) is down ~13.74%. Many people have asked me, “isn’t the price cheap now?”. The short answer is not necessarily. Here’s a brief overview of how to look at overall US market drops and to gauge whether or not the overall market is “cheap”.

1. Recession Market Drops

Since 2000, the S&P 500 has experienced significant declines during U.S. recessions. Here's a summary of how much the market dropped from its highest point to its lowest point during each recession:​

1. Early 2000s Recession (March–November 2001):

S&P 500 Decline: Approximately 49% from peak to trough. ​

2. Great Recession (December 2007–June 2009):

S&P 500 Decline: Approximately 57% from peak to trough. ​

3. COVID-19 Recession (February–April 2020):

S&P 500 Decline: Approximately 34% from peak to trough.

Based on historical recessions, price drops haven’t been that significant. More importantly, price alone is never a good idea to gauge whether or not a stock (or overall market price) is “cheap”. The price needs to be considered relative to value received. In this case, we can look at the price of the overall market relative to the earnings it generates.

2. Price Relative to Earnings

The S&P 500 represents the aggregate price of America’s 500 largest companies. We can compare this price to the aggregate earnings of America’s 500 largest companies. The resulting Price-to-Earnings ratio is ~24.1x. Is this cheap or expensive? Here is a chart of the S&P 500 and its P/E ratio since 1960. The average P/E ratio is 17.2x (median of 17.6x). Relative to historical multiples, the S&P 500 is still considerably rich! This is even after factoring the recent YTD price drop of 13.74%.

When investing, price cannot be a factor alone. It’s price relative to earnings is a first step to giving price some context.