The S&P 500 (SNPINDEX: ^GSPC) tumbled into bear market territory last year as rampant inflation rattled Wall Street. The Federal Reserve responded by raising the benchmark federal funds rate at its fastest pace in four decades, sending other interest rates across the economy higher.
That aggressive monetary policy exacerbated recession fears, and the S&P 500 slipped further into the red as economists became convinced of a looming downturn. In fact, the index delivered its worst calendar-year performance in 2022 since the Great Recession in 2008. But investor sentiment has improved substantially this year.
The S&P 500 rose 15.9% through the first half of 2023, driven higher by cooling inflation, better-than-expected earnings, and stronger-than-expected economic growth. And one stock market indicator says the index will maintain its upward momentum in the coming months.
The S&P 500 could rise 13% by June 2024
Excluding 2023, the S&P 500 and its precursor returned 10% or more in the first half of 22 different years since 1950. The S&P 500 continued climbing higher over the next 12 months in 17 of those years, according to Carson Investment Research. In other words, returns of at least 10% in the first half of any given year have correlated with further gains over the next 12 months 77% of the time since 1950.
The table below provides specific details. The left column shows the year, the middle column shows the first-half return in the S&P 500, and the right column shows the return over the subsequent 12 months.
|
Year |
S&P 500 YTD Returns Through June |
S&P 500 Returns Over the Next 12 Months |
|---|---|---|
|
1954 |
17.7% |
40.5% |
|
1955 |
14% |
14.5% |
|
1958 |
13.1% |
29.2% |
|
1961 |
11.2% |
-15.3% |
|
1967 |
12.8% |
9.9% |
|
1975 |
38.8% |
9.5% |
|
1976 |
15.6% |
-3.6% |
|
1983 |
19.5% |
8.9% |
|
1985 |
14.7% |
30.7% |
|
1986 |
18.7% |
21.2% |
|
1987 |
25.5% |
-10% |
|
1988 |
10.7% |
16.3% |
|
1989 |
14.5% |
12.6% |
|
1991 |
12.4% |
10% |
|
1995 |
18.6% |
23.1% |
|
1997 |
19.5% |
28.1% |
|
1998 |
16.8% |
21.1% |
|
1999 |
11.7% |
6% |
|
2003 |
10.8% |
17.1% |
|
2013 |
12.6% |
22% |
|
2019 |
17.3% |
5.4% |
|
2021 |
14.4% |
-11.9% |
|
Average |
16.4% |
12.2% |
Data source: Carson Investment Research. YTD = year to date.
As previously mentioned, when the S&P 500 produced a first-half return of at least 10%, history shows a 77% correlation with continued gains over the next 12 months. But the table above highlights another interesting data point. When the S&P 500 produced a first-half return of at least 10%, the index gained an average of 12.2% over the next 12 months.
What does that mean? The S&P 500 gained 15.9% in the first half of 2023, bringing the index to 4,450 points at the end of June. If the current situation aligns with the average, the S&P 500 will rise 12.2% from its June 2023 level to reach 4,993 by June 2024. That implies 13.4% upside from its current level of 4,402.
That is particularly bullish (literally) because the S&P 500 is currently 8 percentage points away from a record high. In other words, the S&P 500 is just 8 percentage points from bull market territory, and the index returned an average of 186% over the last nine bull markets, according to Hartford Funds.
Why now is a good time to invest in the stock market
No stock market indicator is perfect, and momentum does not an investing thesis make. Investors shouldn't buy stocks just because the market is rising, and they shouldn't sell stocks simply because the market is falling. Every situation is unique.
For instance, the Federal Reserve has pushed its benchmark interest rate to a 22-year high and U.S. money supply is contracting for the first time in decades. Those economic indicators have some experts convinced that the U.S. is still headed for a recession, and they may be right.
Fortunately, history makes it perfectly clear that patient investors are well rewarded for their perseverance. The table below illustrates how longer holding periods increase the odds of a positive return in the S&P 500. Probabilities shown in the table are based on returns from January 1928 through December 2022.
|
S&P 500 Holding Period |
Positive Return Probability |
|---|---|
|
1 year |
73% |
|
3 years |
84% |
|
5 years |
88% |
|
10 years |
94% |
|
20 years |
100% |
Data source: Capital Group, Crestmont Research.
As shown above, the S&P 500 and its precursor produced a positive return over every rolling 20-year period since 1928. Investors have no reason to expect a different outcome in the future. That means investors who buy an S&P 500 index fund today will almost certainly make money over the next 20 years.
Indeed, the S&P 500 returned 531% over the last 20 years, or 9.6% annually, despite the occurrence of two recessions during that time. At that rate, $150 invested weekly in an S&P 500 index fund would grow into $446,700 over the next two decades.
Those reliable returns explain why Wall Street legend Warren Buffett has often said an S&P index fund is the best way for most people to invest their money.
