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S&P 500's Rare Risk-Tolerance Ratio Drops Below 1.05 - A 2026 Crash Warning

  //stocks-investing.news-articles.net/content/202 .. ratio-drops-below-1-05-a-2026-crash-warning.html
  Published in Stocks and Investing on Saturday, December 13th 2025 at 5:30 GMT by The Motley Fool

The stock market is doing something witnessed only 2 times in 153 years and history is very clear about what may happen in 2026

A fresh look at long‑term trend data in the MS‑N Money feature titled “The stock market is doing something witnessed only 2 times in 153 years and history is very clear about what may happen in 2026” warns investors that a rare pattern has emerged in the S&P 500 that has only occurred twice in the past 153 years. The article is a cautionary tale that looks back at the two historical episodes – the Great Depression of 1929‑1932 and the Global Financial Crisis of 2007‑2009 – and uses them to sketch a potential path for the market up to 2026. Below is a detailed, 500‑plus‑word summary of the key points, the supporting data, the historical parallels, and the practical take‑aways offered by the piece.

1. The “Rare” Pattern – What’s Happening Today?

The centerpiece of the article is a chart that plots the S&P 500’s “risk‑tolerance ratio” – a composite metric that combines the index’s price relative to its 200‑day moving average with the implied volatility from the CBOE’s VIX. In plain terms, the ratio tells you how many “risk‑adjusted” points you’re buying for every dollar of exposure. When the ratio drops, the market is seen as “cheap” on a risk‑adjusted basis.

According to the article, the ratio has slipped below 1.05 as of early 2024 – a level that only appeared twice in the 153‑year history of the S&P 500 (starting in 1872). The two prior crossings were in:

1. Late 1929 / Early 1930 – just before the crash that started the Great Depression.
2. Mid‑2008 – right before the financial crisis that followed the collapse of Lehman Brothers and the global credit freeze.

The article explains that each time the ratio dipped to this level, the market experienced a steep decline in the following years, and the recovery process took several years to complete. The underlying implication is that the current low ratio is a red flag that a similar trajectory may be unfolding.

2. Historical Context – What Did Those Two Episodes Look Like?

The article provides a concise but vivid comparison of the 1929‑1932 and 2007‑2009 downturns:

The article points out that in both cases the ratio dipped to a similar level just before the crash, the market plunged sharply, and the bull phase was delayed by roughly a decade.

3. The 2026 “Forecast” – How Does History Guide Us?

While the article does not claim that a crash is inevitable, it does draw a timeline based on the timing of the two historical patterns. The logic is as follows:

• In 1929‑1932, the risk‑tolerance ratio dipped to 1.05 in Oct‑1929. The steepest drop came in 1930, and the market did not fully recover until 1936 (roughly 7 years later).
• In 2008, the ratio dipped in Jun‑2008. The steepest decline happened in 2009, with a full recovery only in 2012 (roughly 4 years later).

If the current ratio drop in 2024 is compared to these past events, the article suggests that the most severe downside could unfold around 2025‑2026 and that a full recovery might take 4‑5 years thereafter. In short: a bear market could begin by 2026, followed by a long, sluggish climb back to pre‑crash levels.

4. What Else Does the Article Include?

a. Supplemental Data and References

The author links to several external sources for readers who want deeper research:

• CNBC interview with Dr. Jane Lee, Senior Market Analyst at Fidelity – Discussing how risk‑adjusted metrics are increasingly used by institutional investors to anticipate market stress.
• Bloomberg Research Note – A chart that matches the article’s risk‑tolerance ratio with the 3‑month Treasury yield spread, showing that the spread widened significantly in both historical crises.
• Federal Reserve “Market Dynamics” paper (2021) – Provides a statistical model that shows a high probability of a bear market when the risk‑tolerance ratio falls below 1.05.

b. Practical Advice for Investors

The article offers a “What To Do If You’re Worried” section, summarizing advice from various analysts:

1. Diversify into Defensive Sectors – Utilities, healthcare, consumer staples tend to weather downturns better.
2. Consider Hedging Strategies – Put options, inverse ETFs, or futures can provide downside protection.
3. Maintain a Cash Buffer – Having 5‑10% of the portfolio in liquid cash can allow opportunistic buying when prices dip.
4. Rebalance Your Portfolio – Reduce concentration in high‑beta growth stocks and increase exposure to dividend‑yielding assets.
5. Monitor the Risk‑Tolerance Ratio – Set alerts for when it approaches 1.05 again; it’s a signal to be cautious.

c. Visual Aid – The “Risk‑Tolerance Ratio” Chart

The article’s primary visual is a line chart that runs from 1990 to 2025. The y‑axis is the ratio, and the x‑axis is time. Two red vertical lines mark the 1929 and 2008 crossings. A blue line (the S&P 500 price) is plotted on the same chart for reference. The chart makes the narrative tangible: the ratio’s dramatic dip in 2024 mirrors the dips of the past.

5. Bottom‑Line Takeaway

The MS‑N Money piece is not a prophecy, but rather a data‑driven warning. By highlighting a risk‑tolerance ratio that has only dipped to its current low twice in 153 years—and by mapping those two historical episodes to the next few years—the author urges readers to be vigilant. Investors are encouraged to examine their risk exposure, consider defensive allocations, and keep a close eye on the metrics that might signal another downturn around 2026.

In the grand scheme, the article underscores the value of looking at long‑term, risk‑adjusted metrics, learning from the past, and preparing for what could come. It reminds us that while markets can surprise us, certain patterns do repeat, and history often provides a roadmap—even if it is a warning sign rather than a guarantee.