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Just How Safe Is the Stock Market Right Now? History Has Good News for Investors. | The Motley Fool

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  Published in Stocks and Investing on Tuesday, August 26th 2025 at 3:41 GMT by The Motley Fool
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How Safe Is the Stock Market Right Now? A Look Back at History to Paint the Full Picture

The headline question—“just how safe is the stock market right now?”—is one that has resurfaced with particular urgency in the wake of the 2022 sell‑off, the 2023 mid‑year rally, and the ever‑present chatter about inflation and interest‑rate policy. In a detailed piece published by The Motley Fool on August 26, 2025, the author dives into the numbers that matter to investors, drawing on decades of market history, volatility indices, and academic research to answer that question in all its complexity.

1. A Historical Baseline: Long‑Term Returns vs. Drawdowns

The article starts with the fundamental premise that, historically, equity markets have delivered a positive return over the long haul. The S&P 500, the benchmark for U.S. large‑cap stocks, has an average annual return of roughly 10 % over the past 90 years, excluding dividends, when compounded. That figure, however, hides a wide dispersion in outcomes over shorter time frames.

One of the key metrics the author emphasizes is the maximum drawdown—the largest percentage decline from a peak to a trough during a specific period. In a 10‑year window, the median drawdown is roughly 30 %. In the worst decade (the 2000s, dominated by the dot‑com bust and the 2008 financial crisis), the drawdown spiked to 58 %. In the 2020 pandemic crash, the index fell about 34 % from its March peak, but recovered in less than a year.

To illustrate the range of risk that a typical investor might face, the article includes a simple table that shows 5‑, 10‑, and 20‑year horizons, with the following approximate outcomes:

These figures make clear that “safe” is relative: a portfolio that earns 10 % a year can still be wiped out by a single sharp sell‑off.

2. Volatility, the VIX, and the Current Landscape

Volatility—the statistical measure of price swings—is quantified by the standard deviation of returns. Over the past decade, the S&P’s annualized volatility has hovered around 15‑16 %. The article references a link to CBOE’s VIX index, the so‑called “fear gauge.” The VIX reached a high of 30.5 in early 2022 during a sharp decline in equity prices. By the time of writing, it was around 17, roughly half of its peak but still above the 10‑year average of 15.

Higher volatility inflates the risk‑adjusted performance. The article reminds readers of the Sharpe ratio, which divides the excess return over the risk‑free rate by the portfolio’s volatility. Using the 2025 data, the S&P’s Sharpe ratio was about 0.6, slightly better than the 0.5 it was in 2023, indicating that the market’s reward per unit of risk had modestly improved.

3. Correlations and Diversification: The Safety of a Mixed Portfolio

A recurring theme in the piece is that safety is not a function of a single asset class but of how those classes behave relative to one another. The article links to a Morningstar analysis that shows the S&P 500’s correlation with U.S. Treasury bonds is only about 0.3. Gold, on the other hand, has a correlation of roughly 0.2 with equities, making it a useful hedge in times of stress.

During the 2022 sell‑off, bonds outperformed equities by a wide margin. The article cites a Federal Reserve data release that showed 10‑year Treasury yields fell from 3.4 % in early 2022 to 2.2 % by mid‑2025, reflecting the Fed’s easing stance to support the economy. Corporate bonds, with a slightly higher yield (around 5 % at mid‑2025), provided an attractive alternative to equity investors worried about potential downturns.

4. Value at Risk (VaR) and Expected Shortfall: Quantifying the Worst

The author spends a good deal of time unpacking two sophisticated risk metrics: Value at Risk (VaR) and Expected Shortfall (ES). VaR estimates the maximum loss over a specified period at a given confidence level. For a portfolio matched to the S&P 500 with a 95 % confidence interval over one month, the VaR was approximately 7 %. In other words, there’s a 5 % chance the portfolio could lose more than 7 % in a month. ES goes a step further, calculating the average loss in the worst 5 % of scenarios, and was around 10 % for the same portfolio.

While these numbers are abstract for the average investor, the linked Investopedia article in the Fool piece explains that they help frame the tail risk—the risk of an extreme event that could erode a significant portion of a portfolio in a short period.

5. Policy, Inflation, and What That Means for “Safety”

A final major point is the influence of macro‑policy. The article links to a Bloomberg analysis that explains how rising inflation, followed by higher interest rates, compresses equity valuations. Over the past year, inflation has hovered around 3.5 %, prompting the Fed to keep the federal funds rate in the 4.5‑5.5 % band. As rates rise, the discounted cash‑flow valuations that underlie many equities will adjust downward, leading to a potential pullback in market prices.

However, the author balances this caution by highlighting the resilience of high‑quality, dividend‑paying companies. The S&P 500 Dividend Aristocrats list, linked in the article, shows that these firms have historically weathered rate hikes better than the broader market, maintaining more stable returns during turbulent times.

6. Bottom Line: The Stock Market Is Not “Risk‑Free,” but It Has a Strong Historical Record

The Fool article concludes with a nuanced summary: “The stock market remains one of the most productive sources of long‑term growth, but it is far from risk‑free. Historical data show that while average returns are solid, there is always a probability of a significant drawdown, especially in a period of tightening monetary policy and high inflation.”

For the ordinary investor, the key takeaways are:

1. Time horizon matters – the longer you can stay invested, the less a single bad year will hurt.
2. Diversification protects – combining equities with bonds and a small allocation to gold or other safe havens reduces overall volatility.
3. Risk metrics give context – VaR and ES help you understand the potential magnitude of extreme losses.
4. Stay informed – following policy changes, inflation data, and volatility indicators like the VIX provides early warning signs.

In short, while the market is not immune to risk, a disciplined, diversified strategy—grounded in historical context—remains the best defense against the inevitable bumps along the road.