Regardless of whether you’re a Wall Street professional or everyday investor, 2022 has been a historically challenging year. The S&P 500 (^GSPC -1.13%), which is often viewed as the barometer of the stock market’s health, turned in its worst first-half return since 1970. Meanwhile, the Nasdaq Composite (^IXIC 0.00%) plunged as much as 34% below its mid-November high. In other words, both widely followed indexes firmly entered a bear market.
These declines come on the heels of back-to-back quarterly retracements in U.S. gross domestic product, as well as a knock-your-socks-off 9.1% inflation rate in June 2022. That’s the highest inflation reading in a little more than four decades.
While history would suggest that the S&P 500 and Nasdaq are likely headed even lower, one investment strategy has been foolproof in making patient investors richer.
History isn’t Wall Street’s friend — at least in the short run
Before getting to the one rock-solid strategy that hasn’t failed long-term investors for more than a century (and counting), let’s deal with the elephant in the room: History. As much as investors love when the stock market is heading higher, three indicators with a successful track record of calling bear market bottoms imply the S&P 500 and Nasdaq Composite have further to fall.
For example, margin debt usage has predicted each of the last three bear markets before they occurred. “Margin debt” is the amount of money investors are borrowing from their brokerage, with interest, to purchase or short-sell securities. While it’s perfectly normal to see margin debt increase over time as the value of equities increases, it’s not normal for margin debt outstanding to increase rapidly in a short period.
Since the beginning of 1995, there have been three instances where margin debt increased by a minimum of 60% over a trailing-12-month (TTM) stretch. It occurred immediately before the dot-com bubble burst, which saw the S&P 500 ultimately fall to 49% of…
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