What Happens After A New All-Time High?
Data shows an upside... especially when factoring in the Fed.
2023 finished on a high note as equity and bond markets rallied, returning an unexpected Q4 gain. 2024 started off on a more cautious note, as investors questioned the pricing of rate cuts from the Fed. But the concerns were pushed aside as the S&P 500 rose to new all-time highs.
But where next when a market hits a new high?
The current state of the stock markets is favourable, and we anticipate that they will experience further growth in 2024, reaching new heights. This can be attributed to a sustained yet moderated expansion of the economy, along with declining inflation rates and the imminent reduction of interest rates by central banks. Let’s break it down.
What Is The Trend Following New Highs?
Historically, investing at all-time highs has been a positive indicator for future gains. An analysis of data dating back to 1970 reveals that, on average, one year after investing at a new high, the S&P 500 has experienced gains over 70% of the time, with a median return of 12.1%. This median return is higher than the overall median return of 10.5% for investing at any point.
It is worth noting that the S&P 500 seldom reaches a new high and then fails to continue its rise.
In 2023, the S&P 500 recorded a 26% total return. Analysis of the market's performance after calendar years with rallies of 20% or more shows that out of the 14 other similar instances since 1970, 11 of them (almost 80%) showed positive growth the following year. Moreover, the median return in the subsequent year was 13.7 per cent. However, if we apply this trend to 2023, with a year-end close of 4,769, it indicates that the S&P 500 may cross 5,400 by year-end. Not to put a dampener on things, but it's important to note that past performance doesn't guarantee future results (life would be much easier if they did).
Fed Cutting Cycles
Historically, after the first rate cut by the Fed in a period where a recession is avoided, the S&P 500 has shown an average rally of around 16% in the following 12 months. Moreover, five out of the 10 best years for the S&P 500 in the last four decades have occurred when the Fed was cutting rates without a recession. These years were 1985 (32%), 1989 (32%), 1995 (38%), 1998 (29%), and 2019 (31%).
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